Put Option: Meaning, Definition & Indian Stock Market Examples

Right (not obligation) to sell an asset at a fixed strike price before expiry.

Disclaimer: This article is for educational purposes only and does not constitute SEBI-registered investment advice. Consult a SEBI-registered investment advisor before making investment decisions.

What is Put Option?

A put option gives the buyer the right — but not the obligation — to sell an underlying asset at a specified strike price before or on expiry. Buyers pay a premium and profit when the asset's price falls. Maximum loss for the buyer = premium paid. Puts are commonly used for portfolio hedging and short-side speculation.

Put Option — Indian Stock Market Example

Buying Nifty 21,500 Put at ₹100 premium: if Nifty falls to 21,000, the put is worth ₹500 (profit ₹400 per unit × 50 = ₹20,000 per lot). Portfolio hedging using Nifty puts is common among mutual funds and HNIs to protect against market corrections during uncertain periods like Union Budget or election results.

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Frequently Asked Questions about Put Option

How do I use puts to hedge my equity portfolio?

Buy ATM (At-the-Money) Nifty Puts with notional value matching your portfolio. If your portfolio is ₹10 lakh and Nifty is at 22,000, buy 1 put (50 × 22,000 = ₹11 lakh notional). If markets fall 10%, your portfolio loses ₹1 lakh but your put gains similar value. Premium cost is the insurance premium for protection.

What is a Put-Call Ratio (PCR)?

PCR = Put volume/OI ÷ Call volume/OI. A high PCR (above 1.2–1.5) indicates excessive bearish bets — often a contrarian bullish signal. A very low PCR (below 0.7) indicates excessive bullishness — often a contrarian bearish signal. Nifty PCR is closely watched daily by F&O traders as a market sentiment indicator.

Related Terms

Call Option

Right (not obligation) to buy an asset at a fixed strike price before expiry.

Futures Contract

Binding agreement to buy/sell an asset at a fixed price on a future date.

Short Selling

Selling borrowed shares expecting price to fall — profit from price decline.

Hedging

Taking an offsetting position to reduce risk — insurance against adverse price moves.

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