The Put Option

The put option is the right to sell the underlying security at a certain price on or before a certain date. You would buy a put option if you felt the price of a stock was going down before the option reached expiration.

Continuing , if you felt the stock was about to tank from $25 per share, the only way to profit would be to short the stock, which can be a risky move if you’re wrong. See Short Selling - Not for the Faint Hearted.

You could purchase a put option at $24 per share for $100 (or $1 per share), which would give you the right to sell 100 shares of XYZ at $24 per share.

If the stock drops to $19 per share, you could, in theory buy 100 shares on the open market for $19 per share, then exercise you put option giving you the right to sell the stock at $24 per share – making a $5 per share profit, minus the option cost.

As a practical matter, you would trade your put option, which would now be worth something close to $5 per share or $500.