Put options: The buyer of the Put option has the right to sell the asset at a specific price on or before the expiration date. The seller of the put option has the obligation to buy the asset from the buyer at the specified price on or before the expiration date.
The price of the contract known as Premium is the amount the seller collects from the buyer for taking on the risk. If the contract is not exercised the seller gets to keep the premium.
- Buying a Put option is a considered a bearish position. Owners of Put options will profit when the underlying goes down in price.
- Selling a put option is considered neutral/bullish. The seller of the put option will profit if the underlying trades flat or goes up in price.
If a trader/investor suspects that the market is due for a pullback or downward move they could purchase a Put option to hedge their account helping to offset losses.
If a trader is interested in owning a stock they could sell a Put and collect the premium. If they get assigned this would be like buying a stock at a discount. If unassigned they keep the premium and do the process over again. This would be the start or a strategy called the Wheel Strategy.