As already mentioned, a put option gives traders the right, but not the obligation, to sell the underlying asset at a predetermined strike price once the put option has expired. 

A standard put option is composed of the following:

• Underlying Asset: A put option is based on an underlying asset, which can be a stock, commodity, currency, or other financial instrument
• Strike Price: The strike price is the price at which the option holder can sell the underlying asset if they choose to exercise the option
• Expiration Date: Put options have a limited lifespan, defined by the expiration date. The option must be exercised (if profitable) or allowed to expire worthless by this date
• Premium: The option buyer pays a premium (a fee) to the option seller (writer) for the right to sell the underlying asset. This premium is the cost of the option

Rights Of The Option Holder

Put options give certain rights to the option holder. This gives them some flexibility in their decision making when choosing to exercise or sell the option:

• The put option holder has the right to sell the underlying asset at the strike price. If the market price of the asset falls below the strike price, exercising the option can result in a profit
• If the market price is higher than the strike price at expiration, the option holder is not obligated to exercise and can let the option expire. The maximum loss is limited to the premium paid

Risk & Profit Potential 

While the potential loss from an options trade is limited, options trading overall still comes with a few key considerations with regards to risk and potential for profit:

• The risk for the put option holder is limited to the premium paid for the option. This is in contrast to short-selling the underlying asset, where the potential loss is theoretically unlimited
• The potential for profit in a put option trade arises when the market price of the underlying asset falls below the strike price by an amount greater than the premium paid for the option
• The profit is not capped; it can theoretically be unlimited if the asset's price declines significantly

Obligations Of The Option Writer

Writing put options comes with a few requirements. Writing naked put options is considered highly risky as the downside for the writer is practically unlimited.

• The put option writer (seller) has the obligation to buy the underlying asset at the strike price if the option holder decides to exercise the option
• In exchange for taking on this obligation, the option writer receives the premium from the option buyer

Put options come with their fair share of advantages and disadvantages, which are important for traders to consider to help them decide whether options trading is the best course of action for their financial objectives.

Pros

• Profit from Price Declines: Put options allow traders to profit from falling asset prices. When the market price of the underlying asset drops below the strike price, the value of put options increases, potentially providing significant profits
• Hedging: Put options can be used as a form of insurance to hedge against potential losses in an existing long position. They provide downside protection and limit losses when the market moves against the trader's position
• Limited Risk: The maximum loss for a put option buyer is limited to the premium paid for the option. This limited risk is advantageous compared to short-selling the underlying asset, which carries unlimited loss potential

Cons

• Time Decay: Put options are affected by time decay, which means their value decreases as they approach expiration. If the market doesn't move in the expected direction before expiration, the premium paid for the option is lost
• Volatility Risk: High volatility can increase the cost (premium) of put options, making them more expensive. Additionally, rapid price fluctuations can lead to increased uncertainty and potential losses for option buyers
• Limited Profit: While put options provide the potential for profit when the market falls, the profit is capped at the difference between the strike price and the market price of the underlying asset, minus the premium paid. This limited profit potential contrasts with short-selling, where profits are theoretically unlimited

• Put options are financial derivatives that profit from the downward movement of an underlying asset’s price 
• Put options give traders the right, but not the obligation, to sell an asset at a predetermined strike price, before the expiration of the put option 
• The risk of put options is limited to the premium paid for the options, which makes them attractive for traders as a means of hedging existing positions 
• Put options are affected by time decay, which means that their value gradually decreases as they near the date of expiration