A put option is a contract that gives the holder the right – but not the obligation – to sell a specified quantity of an underlying asset at a predetermined strike price before a given expiration date. Puts profit when the underlying asset’s price falls below the strike, making them the primary instrument for bearish bets and downside hedging.
Key components#
- Underlying asset – the token or asset the option references.
- Strike price – the price at which the holder can sell.
- Premium – the upfront cost paid by the buyer. This is the buyer’s maximum possible loss.
- Expiration date – the deadline to exercise.
Moneyness#
| State | Condition | Intrinsic value |
|---|---|---|
| In-the-money (ITM) | Spot < Strike | Positive |
| At-the-money (ATM) | Spot ≈ Strike | Zero |
| Out-of-the-money (OTM) | Spot > Strike | Zero |
Note that moneyness for puts is the mirror of call options – a put is ITM when the spot price is below the strike.
Payoff#
At expiration the payoff of a long put is:
payoff = max(strike - spot, 0) - premiumThe buyer’s downside is capped at the premium. The maximum profit occurs if the underlying goes to zero, yielding strike - premium.
Example#
A trader buys an ETH put with a $2,000 strike, expiring in 30 days, for a $120 premium.
- If ETH drops to $1,500 at expiry, the option is worth $500 and the net profit is $380.
- If ETH stays above $2,000, the option expires worthless and the loss is $120.
Common strategies#
- Protective put – hold the underlying asset and buy a put to insure against a price drop. This is the options equivalent of a stop-loss, but with a guaranteed floor.
- Bear put spread – buy a put at a higher strike and sell a put at a lower strike, reducing premium cost but capping the maximum profit.
- Long put – a straightforward directional bet that the asset’s price will decline.
Comparison with call options#
A call option gives the right to buy; a put gives the right to sell. The two are connected through put-call parity: for European-style options with the same strike and expiry, the prices of the call and put imply each other given the spot price and risk-free rate.
On-chain options#
DeFi protocols like Lyra, Hegic, and Opyn implement puts as smart contracts on Ethereum and other chains. The seller’s collateral is locked in the contract, removing counterparty risk. Settlement at expiry is automatic – if the put is ITM, the holder receives the difference between the strike and the spot price.
Puts are especially popular on-chain as portfolio insurance. Holding ETH plus an ETH put creates a position with limited downside, which is attractive in the high-volatility crypto environment.
Risks#
- Total premium loss – if the option expires OTM, the entire premium is lost.
- Time decay – theta erodes the option’s time value as expiry approaches, working against the buyer.
- Volatility contraction – a drop in implied volatility reduces the put’s price even if the spot hasn’t moved upward.
- Smart contract risk (DeFi-specific) – exploits in the protocol can lead to loss of funds.