<p>A put option is a financial derivative that gives the holder the right, but not the obligation, to sell an underlying asset at a predetermined price (<a href="/NewSite/encyclopedia/strike-price/" class="ency-link">strike price</a>) before the option's expiration date.</p>

<h2>How It Works</h2>
<p>A put option is a contract between two parties: the buyer and the seller (also known as the writer). The buyer pays a premium to the seller for this right. The option's value is derived from the difference between the current market price of the underlying asset and the strike price. Here's how it works:</p>
<ul>
  <li><strong>Buying a Put:</strong> The buyer expects the price of the underlying asset to fall. If the price does fall below the strike price, the buyer can exercise the option, sell the asset at the strike price, and make a profit.</li>
  <li><strong>Selling (Writing) a Put:</strong> The seller expects the price of the underlying asset to rise or stay the same. The seller receives the premium as income and, in exchange, may have to buy the asset at the strike price if the buyer exercises the option.</li>
</ul>

<h2>Why It Matters</h2>
<p>Put options serve several purposes in the financial markets:</p>
<ul>
  <li><strong>Hedging:</strong> Investors use put options to protect their portfolios from market downturns. If the value of their investments falls, the put option allows them to sell at a predetermined price, limiting their losses.</li>
  <li><strong>Speculation:</strong> Traders may buy put options if they believe the price of an asset will fall. If their prediction is correct, they can make a significant profit.</li>
  <li><strong>Income Generation:</strong> Selling (writing) put options can generate income for investors. However, it also exposes them to potential losses if the price of the underlying asset falls.</li>
</ul>
<p>Understanding put options is crucial for anyone involved in derivatives trading, as they provide valuable tools for risk management and profit-making opportunities.</p>