Put Options
Understand crypto put options: downside rights, premium, expiry payoff, protective use, seller exposure and settlement risk.
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A put option gives its buyer the contractual right to obtain downside payoff below a specified strike under the contract’s rules. Puts can be used for directional downside exposure or as a hedge, but the premium paid and the exact settlement design determine the economic result.
What a put actually provides
A put is defined by an underlying, strike, expiry, premium, contract size and settlement method. The buyer pays premium for downside optionality; the seller receives premium and accepts the opposite obligation.
That formula describes intrinsic value, not total P&L. The buyer must subtract premium and costs. A seller’s payoff is the mirror image before margin, fees and liquidation effects.
Put payoff and moneyness
| Expiry spot | £80,000 strike put intrinsic value | Interpretation |
|---|---|---|
| £90,000 | £0 | Out of the money |
| £80,000 | £0 | At the strike |
| £70,000 | £10,000 | In the money before premium |
For a simplified one-unit long put, expiry breakeven is roughly strike minus premium. Before expiry, the option can retain time value even when spot is above the strike.
Directional put versus protective put
The same put can serve different portfolio purposes:
Directional downside
The trader buys a put because they expect a sufficiently large/fast fall relative to the premium priced.
Protective hedge
An asset holder buys a put to place a contractual floor on part of the portfolio’s downside over a defined period.
A hedge is not “free protection”. Premium is the cost of insurance-like asymmetry, and the chosen strike determines how much downside is retained before the option becomes valuable.
Worked example
Assume a one-unit £80,000 strike put costs £3,500. Ignore fees and multiplier effects.
- Expiry spot £70,000 → intrinsic value £10,000 → simplified P&L +£6,500.
- Expiry spot £78,000 → intrinsic value £2,000 → simplified P&L −£1,500.
- Expiry spot £85,000 → intrinsic value £0 → simplified P&L −£3,500.
If the put was purchased as a hedge against an owned coin position, the option result should be assessed together with the loss/gain on the underlying rather than in isolation.
Common mistakes and misunderstandings
- Calling a protective put profitable merely because it gained value while the underlying fell.
- Ignoring the premium drag of repeatedly buying downside protection.
- Assuming a strike is a guaranteed cash exit price without reading settlement rules.
- Confusing a long put’s limited premium risk with a short put’s much larger downside exposure.
- Comparing puts only by premium without normalising strike, expiry and implied volatility.
Knowledge checkpoint
Q1. Why can an in-the-money put still lose money after premium?
Q2. How does a protective put change the downside distribution of an owned asset?
Q3. Why is a lower-strike put generally cheaper but less protective, all else equal?
Q4. What risk does a short put seller accept that the long put buyer does not?
FAQ
❓ Are puts only for bearish speculation?
No. They can also be used as defined-period downside hedges.
❓ Can a put lose money if the underlying falls?
Yes. If the fall is too small relative to the strike and premium, the trade can still lose.
❓ Does a put guarantee I can sell spot at the strike?
Not necessarily. Crypto options often use cash or venue-specific settlement; read the contract specification.
❓ Is short-put risk limited to the premium received?
No. The premium is income to the seller, but downside obligations can be much larger.
Summary
- Puts provide downside optionality below a strike in exchange for premium.
- Payoff, premium and portfolio context must be analysed together.
- Protective puts transfer some downside risk but have a recurring cost.
- Short puts carry materially different and potentially large margin/liquidation risk.
Use this lesson as one component of a wider risk and execution process. Derivative specifications, margin formulas, settlement and loss-allocation rules can differ substantially between venues.
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