What Is a Put Option and How Does It Protect against Price Drops?

A put option is a financial contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price (the strike price) within a specific time frame. It protects against price drops by setting a guaranteed minimum selling price.

If the market price of the asset falls below the strike price, the option holder can still sell at the higher strike price, thus limiting their losses. The cost of this protection is the premium paid to purchase the option contract.

If the market price stays above the strike price, the option expires worthless, and the loss is limited to the premium.