Contents
Definition
A put option is a derivative contract that grants the buyer the right — but not the obligation — to sell a specified underlying asset at a pre-agreed strike price on or before expiry, in exchange for an upfront premium. Put options gain intrinsic value as the underlying falls below the strike. The seller (writer) receives the premium and is obligated to purchase the underlying if the buyer exercises. In India, index puts are European-style; single-stock puts are American-style (same as calls). Source: NSE F&O Contract Specifications; SEBI Derivatives Framework.
How It Is Priced
Put premium = Intrinsic value + Time value:
- Intrinsic value = max(Strike − Spot, 0). A put is ITM when spot < strike.
- Time value: Same drivers as a call — time to expiry, implied volatility, risk-free rate.
- Put-call parity: A fundamental pricing constraint — C − P = S − K × e^(−rT) (where C = call price, P = put price, S = spot, K = strike, r = risk-free rate, T = time). Arbitrageurs enforce this relationship in liquid markets; significant deviations are exploited immediately.
Key Greeks for put buyers:
- Delta: Negative for put buyers (−0.5 for ATM; approaches −1 for deep ITM). A ₹1 fall in the underlying increases an ATM put value by ~₹0.50.
- Theta: Negative — time decay erodes put value daily. Same acceleration pattern as calls near expiry.
- Vega: Positive — rising implied volatility increases put value. Puts often rise in value during market stress even before the underlying falls, because IV spikes first.
Market Mechanics
- Settlement: Index puts — cash settled. Single-stock puts — physically settled if exercised ITM at expiry (buyer receives short delivery obligation, which triggers exchange auction if not covered).
- Lot size: Same as calls and futures for the same underlying. Nifty 50: 25; Bank Nifty: 15.
- STT: 0.0625% of premium on buy side; 0.125% of intrinsic value on exercise.
- Margin for put sellers: SPAN + exposure margin. Put sellers face large losses if the underlying crashes sharply — the margin system marks this to market daily and may issue intraday margin calls during fast moves.
Risk Profile
For put buyers: maximum loss is structurally capped at the premium paid — the instrument's payoff structure prevents losses beyond the outlay. However, SEBI's July 2024 retail F&O study confirms 89% of individual put buyers incurred net losses over FY22–FY24, with the primary mechanism being theta decay on OTM puts held through sideways or mildly rising markets. A put purchased during a high-IV spike (market fear event) will suffer rapid premium collapse (vol crush) even if the underlying moves modestly in the buyer's favour. For put sellers: risk is asymmetric — maximum profit is the premium; maximum loss = Strike − Premium (if underlying goes to zero). Put selling during tail events (March 2020 crash: Nifty −38% in 6 weeks; March 2008 crisis) produced catastrophic losses for writers who were not adequately hedged.
Worked Example
Nifty 50 is at 24,500. A trader buys 1 lot of the 24,000 Put (OTM, 500 points below spot) expiring in 28 days, at ₹95/unit. Total outlay: ₹95 × 25 = ₹2,375. Break-even at expiry: 24,000 − 95 = 23,905 (Nifty must fall 2.4% for break-even).
Scenario A: Nifty falls to 23,200 at expiry. Intrinsic value = 24,000 − 23,200 = ₹800. P&L = (800 − 95) × 25 = ₹17,625 gain (742% return on ₹2,375 outlay).
Scenario B: Nifty rises to 24,800. Put expires OTM; loss = ₹2,375 (100% of premium).
Scenario C (vol crush): Nifty stays at 24,500 but IV drops from 18% to 13% (post-event calm). The put might lose 40% of premium value in a day despite spot being unchanged — IV change, not direction, drove the loss.
Caveats
- Puts do not automatically offset all portfolio losses. Structurally, they limit the loss on the put position itself to the premium paid. Using puts as portfolio hedges introduces basis risk (the put underlying may not perfectly offset the portfolio's composition) and theta cost that erodes value even when no crash occurs.
- Buying puts after a sharp market fall is often expensive (high IV) and poorly timed — the protection is priced in at the worst moment.
- Single-stock short puts at expiry require the seller to take physical delivery — verify adequate cash/margin for the full contract value before selling puts on individual stocks.
See Also
Primary Source
NSE — Equity Options Contract Specifications; SEBI Study on F&O Retail Participation, July 2024
MintByte (ARN-314872 / APMI APRN-01658) provides this glossary for educational purposes only. Nothing here constitutes investment advice, a recommendation to buy or sell any security, or a guarantee of returns. Equity and derivatives trading involves risk of loss. Consult a SEBI-registered adviser before making investment decisions.