Options give you the right to buy or sell something (often shares, but they can be used in connection with other financial assets) for an agreed price on or before a certain date.A put option gives someone the right to sell a share.
In order to have the option to buy or sell something, you have to pay a fee known as a premium to the seller of the option (who is known as the option writer). You might buy a put option if you thought that a share was likely to fall in price and you wanted to profit from that happening.
Another way to use put options is to hedge your portfolio against a drop in the market. For example, fund managers often buy put options on a stockmarket index to protect their portfolio so that if the stockmarket falls, the profits on the option will offset the losses on the shares in the portfolio.
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In the UK, options contracts are sold in blocks of 1,000 shares. Say XYZ plc is trading at 100p per share and a put option, giving the right to sell at 90p, costs a premium of 5p. The cost of the option is £50 (5p x 1,000). If the shares fall to 70p, you would make a profit of £150 ((90p-70p-5p) x 1,000).
If the shares go up, you let the option expire, and you lose your entire premium paid of £50.
