Put Options Explained: How They Work on NSE

A clear, India-focused explanation of put options — how they work, who buys them, hedging examples, and why most retail put buyers also struggle to make money.

2 November 2024 · 7 min read

A put option is the mirror image of a call. It gives the buyer the right — but not the obligation — to sell a stock or index at a fixed price on or before expiry. In simpler terms: a put pays off when the underlying falls.

How a put option works

Suppose RELIANCE is trading at ₹2,800. You're worried about a correction. You could buy a 2,700 put for, say, ₹40 per unit. The RELIANCE lot size is 250, so the total premium is ₹40 × 250 = ₹10,000.

At expiry:

If RELIANCE falls to ₹2,600, the put has intrinsic value of ₹100 (2,700 − 2,600). You receive ₹100 × 250 = ₹25,000. Profit: ₹15,000.
If RELIANCE stays above ₹2,700, the put expires worthless. You lose the ₹10,000 premium.
If RELIANCE falls only to ₹2,680, the put is worth ₹20 × 250 = ₹5,000. You still lose ₹5,000.

Three reasons people buy puts

Bearish directional bet. You expect a fall and want leverage with capped risk.
Hedging an existing portfolio. If you hold RELIANCE shares, buying a NIFTY put can offset some losses if the broader market drops.
Buying insurance for a specific event. Earnings, RBI announcement, Budget — known risk events where you want protection without selling holdings.

The hedging use case (most common for serious investors)

Say your portfolio is ₹20 lakh in Indian large-caps. You're worried about a 10% drawdown over the next month. You could buy NIFTY puts whose total delta is approximately equal to your portfolio's correlated exposure. A common rule of thumb: 1 NIFTY lot (75 × current spot) covers roughly ₹17–18 lakh of a NIFTY-correlated portfolio.

The cost of this insurance is the premium. Like real insurance, you usually "lose" the premium if no disaster happens — that's the price of sleeping at night.

Put writers (sellers)

Selling a put means receiving premium in exchange for an obligation to buy at the strike if the buyer exercises. This is a popular strategy among traders who:

Want to acquire a stock at a lower price anyway ("cash-secured put").
Have a neutral-to-bullish view and want to harvest premium.
Run systematic high-volume options selling strategies (typically institutions).

Put writers face significant margin requirements and theoretically large but bounded losses (stock can't fall below zero).

Why puts are harder for retail than they look

Implied volatility is usually elevated when puts feel "obvious." During market stress, put premiums spike — the protection is most expensive when you most want it.
Time decay is brutal. A 1-month, 5% out-of-the-money put loses value daily even if the market is flat.
Markets drift upward over time. Index puts have a structural headwind because long-term equity returns are positive.

The same SEBI study cited in our call options article applies here: most retail F&O participants lose money. Put buying without a clear plan is no exception.

How a put option works

Three reasons people buy puts

The hedging use case (most common for serious investors)

Put writers (sellers)

Why puts are harder for retail than they look

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