Put options are financial (smart) contracts that give the owner the right, but not the obligation, to sell a certain token at a specified price before a specific expiration date
A put is a contract that gives you the right to sell an underlying asset at a specific price. Put options increase in value as the underlying asset decreases in value. It is the opposite of a call contract.
When you buy a put, you are purchasing the right (paying someone else) to sell the underlying asset at a certain price later. With flash swaps, you don’t need to own the assets you want to sell later. You can profit from the in-the-money option and exercise it without ever owning the asset.
Vitalik purchases one Ethereum put option (ETH) on Feb 05 with a $1000 strike price for a $45 premium price. The put option expires on Feb 12. Before the put expires, Vitalik sees that Ethereum’s price has dropped to $900, well below the strike price.
Vitalik decides to exercise the contract. He uses his right to sell ETH at $1000. This pockets him a $1000 - $900 - $45 = $55 profit from a $65 initial investment.
The put has protected him from downside losses. If the price had not dropped below $1000, Vitalik would have only lost the $45 in premium, which he can easily regain when Ethereum rises.
Why you should buy a put
Buying a put is a bearish strategy. It is a useful way to limit your downside losses for a particular cryptocurrency pair. It protects you from the dip; ahedge from downside risk. Puts are also a great way for you to speculate on the price depreciation of a cryptocurrency.
If your position expires, then you lose the right to exercise your option.
Selling a put
When you sell a put (write a put), you sell a contract to another party. In doing so, you grant the other party the right to purchase the underlying asset at a certain price from you. You can always get out of your obligation by buying back your put.
Vitalik sells one Ethereum put option (ETH) on Feb 05 with a $1000 strike price for a $45 premium price. As the put option expires on Feb 12, ETH has never dropped below the $1000 strike price. Vitalik keeps the premium price and made a $45 profit.
If the price had dropped below $1000, the other party could have exercised the put, and Vitalik would have had to pay $1000 for the ETH. Which he can easily regain when Ethereum rises, should he be an ETH holder.
Why you should sell a put
Selling a put is a bullish strategy. It is a great way for you to get instant upfront income as you are guaranteed the premium you were paid.
Often times you sell a put for a cryptocurrency you want to own anyway. This increases your chances of being profitable. You essentially get paid for buying the dip.
If your position expires, you can either roll your position to a new option (basically sell a put again) or return the expired put. By returning the put, your asset or payment escrow will be returned to you.
As a buyer, your put is considered “in the money” when the price of the underlying asset is less than the strike price. Puts are considered “out of the money” when the price of the asset exceeds the strike price. And of course, Puts are “at the money” when the price of the asset equals the strike price. Thus extrinsic value exceeds 0 only when the asset price < strike price.
When you buy a put you want the price to go down. You are bearish.
When you sell a put you want the price to go up. You are bullish.