Definition
A put option is a standardized financial contract that grants the holder the right, but not the obligation, to sell an underlying asset at a predetermined strike price within a specified time period. In crypto markets, the underlying asset is typically a specific cryptocurrency or a crypto index, and the contract is traded on derivatives venues. The seller (or writer) of the put option assumes the obligation to buy the underlying asset at the strike price if the buyer chooses to exercise the option. The value of a put option is influenced by factors such as the underlying asset’s price, time to expiration, volatility, and the prevailing risk-free rate.
As a concept, a put option defines a particular payoff structure that benefits from declines in the underlying asset’s price. When the market price falls below the strike price, the put option becomes more valuable because it locks in a higher selling price for the holder. The cost of acquiring this right is the options premium, which the buyer pays upfront to the seller. This structure shapes the risk profile of both parties, with the buyer’s maximum loss limited to the premium and the seller exposed to potentially significant downside if the asset’s price drops sharply.
Context and Usage
In trading contexts, a put option is often associated with protective or speculative positioning around expected price movements and volatility. It can be conceptually related to a hedge, because its payoff can offset losses on an underlying asset position when prices fall. Compared with futures, which create symmetric obligations for both long and short positions, put options create an asymmetric payoff where only the seller is obligated if the option is exercised. The pricing and attractiveness of put options are closely tied to market expectations of volatility, since higher anticipated price swings generally increase the premium required for taking on the associated downside risk.