Definition
Put Option
A put option gives its buyer the right, but not the obligation, to sell an asset at a fixed strike price before expiry — buyers profit when the price falls.
How it works
A put option is a contract that gives the buyer the right to *sell* an underlying asset (a stock or an index like Nifty) at a pre-agreed strike price on or before the expiry date. The buyer pays a premium for this right. If the market price falls below the strike, the put gains value because the holder can effectively sell high while the market trades low. If the price stays above the strike, the put can expire worthless and the buyer loses only the premium.
Example
Suppose Nifty trades at 24,000 and you buy a 23,800 put for a premium of ₹120 (one lot = 75 units). If Nifty drops to 23,500 by expiry, the put is worth 300 points, a healthy gain. If Nifty stays above 23,800, you lose the ₹120 × 75 premium. Your loss as a buyer is capped at the premium paid; your gain rises as the index falls.
In India
Puts are widely used on NSE for both speculation and hedging. A long-term investor holding a portfolio can buy Nifty puts as insurance against a market crash — the put gains as the portfolio falls. SEBI's lot-size rules mean index option contracts now carry a value of roughly ₹15–20 lakh, so positions are meaningful in size.
Common mistakes
Beginners buy cheap out-of-the-money puts hoping for a crash, then watch time decay (theta) erode the premium day after day even when the view is eventually right but too slow to pay off before expiry. Buying a put is a bet on *direction, magnitude and timing* all at once, and being right on direction alone is not enough. Buying puts when implied volatility is already high (after a fall has begun) means overpaying, and a later drop in volatility can shrink the premium even as the index slips. Treat puts as cheap portfolio insurance or a defined-risk directional bet — your loss is capped at the premium — rather than a lottery ticket. Size positions so that a string of premiums expiring worthless, which is the norm for far out-of-the-money puts, won't meaningfully dent your capital, and prefer strikes and expiries that give your view realistic time to play out.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.