Options are financial agreements between a buyer and a seller. An option is a contract that gives the owner the right, but not the obligation, to buy or sell an underlying asset on or before a specific future date. The owner can exercise the option or simply let it expire. Options are generally tied to stocks, futures markets, or commodities.

When an investor buys an option, they establish a contract with a seller. The contract establishes a specific price, called the strike price, at which the contract may be exercised or acted on. A contract also comes with an expiration date. When an option expires, it is defunct and no longer has any value. The investor has the option to use the contract, sell the contract, or to let it expire.

There are two basic types of options: put options and call options. Either can be bought or sold. Put options give the holder the right to sell the asset on or before the expiration date of the contract. Call options give the holder the right to purchase the asset at the strike price on or before the expiration date. In general, investors buy put options when they believe the value of underlying investment will fall in value; they buy call options if they think the value of the underlying investment will rise in value. In either case, the option holder can also sell the option to another buyer during the contract.

The value of an option depends on whether or not it is in-the-money. A put option is in-the-money if the current value of the asset is below the exercise price and out-of-the-money if it is above it. If an option is not in-the-money at expiration, the option is worth nothing.

When an investor buys a put option, they own the right to sell the underlying asset at an agreed upon price until the contract's expiration. When the price of the underlying asset falls, the investor makes money. The more the price falls, the more money is made. Per the contract, the seller of the option must buy the asset at the agreed to price, even if it is higher than the market price. The buyer then purchases the asset for lower market rate, selling it to the option's seller for a profit.

The maximum loss for buying a put option is the cost of the premium plus any related fees. When an investor buys a put option and the underlying asset increases, the put's value falls. The only option then is to sell the put at a loss or let it expire worthless, and the buyer loses the cost of the option's premium.

The maximum profit for a buying put option is limited only by the stock falling to zero. Another way money can be made from buying a put option comes from offsetting or selling the contract before the expiration. If the price of the underlying stock falls, the value of the put increases. The put contract can then be sold for a profit.

Put options offer significant benefits from leverage, and they help limit risk. The advantage of buying a put over shorting an asset comes from limiting exposure to losses. If the asset price does increase loss remains limited to the cost of the option's premium rather than losing the money needed to buy the entire asset's cost if shorted. This strategy maximizes the lower dollar cost of purchasing a put versus purchasing an equivalent amount of stock if the price rises - there's much less cash outlay.

Another important use of put use of options is for portfolio protection. Buying a put option against holding any or all the underlying assets protects against a fall in the share price, while still allowing profits from a rising share price. The upside potential is impacted by the cost of the options, but this strategy can help prevent large losses.