Put options — which are also simply called “puts” — are contracts that offer the buyer the option to sell a specific amount of the underlying cryptocurrency within a specific time frame for a specific “strike” price. The buyer of the put option is not obligated to sell but may exercise their right to sell, as defined by the conditions of the contract.
Put options are essentially the opposite of call options, which provide their owners with the option to buy (as opposed to sell) the underlying coin or token within a specific time frame for a specific strike price.
How put options make money
Put options see their value increase as the underlying cryptocurrency decreases in price. On the flip side, they see their value decrease as the underlying coin or token increases in price. Because of this, puts are most commonly employed as hedges — though they are also frequently used to speculate on a potential decrease in a cryptocurrency’s price.
When used as a hedge, put options — or “protective puts,” in this case — involve a trader buying a put option for a coin or token they hold in their portfolio.
Put options see their value decrease as time moves closer to the expiration date. This “time decay” increases as time moves closer to the expiry — putting more focus on intrinsic value, or the difference between the option’s strike price and the underlying cryptocurrency’s spot price. Intrinsic value is:
- “In the money” if the option has intrinsic value.
- “Out of the money” if the option has no intrinsic value.
Extrinsic value, which depends on the premium, may also be considered.
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Source: https://www.okx.com/academy/en/put-options