Why Would You Buy A Put?
Buying puts is something you do when you think a token price will fall and you are prepared to sell your tokens at a certain price for a premium
Puts are a useful type of Options for price speculation, like Calls, to speculate on the price of a particular cryptocurrency asset going down. Puts are also a very useful tool for hedging your portfolio against a price decline — because buying puts locks in the minimum amount you can sell your underlying asset for. Buying a Put is the opposite of buying a call. It is a bearish strategy.

Making money by expecting a dip

When speculating about a price decline for a particular cryptocurrency, there is no real way currently for you to participate in that price speculation for DeFi. You can sell your previously purchased crypto and wait for a price drop to buy in — but Decentralized Financial Derivatives bring with them the new ability to speculate on price declines. This is a huge improvement for the price discovery of cryptocurrencies. When buying puts, similar to buying calls, you are putting up only a small amount of money in order to speculate in a decline in the price of a much larger asset base. In traditional finance, when exercising a put you would be required to deliver the underlying asset to the short, however, with DeFiDe you can cashless-ly close your option and participate in the price depreciation without actually owning the asset.


Puts are also extremely important for hedging your assets if you are concerned about prices dropping. Suppose you have 10 ETH and you are planning to convert that eth to 10,000 USDC at a later date. You could sell your 10 ETH now and lock it in, however, you could also purchase a put with a strike price of 1,000 USDC / ETH. This allows you to lock in your 10k USDC today for a later date and still get to participate in the upside. If ETH grows to 2,000 USDC / ETH, then you get to cash out at 20,000 USDC. But if ETH drops to 800 USDC / ETH, then your purchased put acts as an insurance contract that lets you sell that 10 ETH for 10,000 USDC.

Example buying a put

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.
Last modified 8mo ago