PUTS: THE RIGHT TO SELL

The mirror contract, on the same strike and deadline: what a fall pays the buyer, what it bills the seller — and the line at 757.50. (Its premium is the lesson’s labeled example number; the published chain set is the call side.) A put is an insurance policy, and thinking of it that way will keep every number in this lesson honest. You insure a house worth $778,120 — 100 shares of SPY at the snapshot, if you like — against its value falling below $773,000 before Nov 30. The insurer charges a premium. If nothing happens, the policy lapses and the premium was simply the cost of sleeping through the autumn. If the house burns — if SPY falls to 700 — the policy pays the difference between the insured value and what is left: $73,000 on a 773 strike. The insurer is the put seller: collecting modest premiums, carrying the rare enormous bill, and pricing both very carefully. Notice the emotional shape, because it is the opposite of the call’s: nobody buys insurance hoping to collect. A put’s first job in a trader’s hands is protection; its second, a defined-risk bet on a fall. Both are priced in this lesson.

PUTS · STAGE 5 · LESSON 3

THE TAKEAWAYS

• The payoff rule, mirrored: at expiration, a put is worth max(strike − SPY, 0) per share. Below the strike it pays the difference; at or above it, nothing — nobody exercises a right to sell at 773 what the market buys for more. The buyer’s result is that value minus the premium; the seller’s is the premium minus that value. Note where this lesson’s contract starts: with SPY at 778.12, the 773 put is out-of-the-money — it needs a fall of 5.12 points before it holds a cent of expiry value, and a fall past 757.50 before its buyer profits. The same strike that was in-the-money for the call is out for the put; Lesson 5 makes a language of that.
• The protection seat, in arithmetic. Own 100 shares of SPY (worth $77,812 at the snapshot) and buy the 773 put at the example premium: for $1,550 — about 2.0% of the position — the shares carry a floor at 773 until Nov 30. Finish at 700 and the position is worth $70,000 in shares plus $7,300 from the put: the floor held, minus the premium. That is a real and honourable use of this contract — and the fx panel below prices what doing it permanently would cost, because insurance renewed forever is a strategy with a drag, not a free shield.
• The seller’s bill, tabulated (they collected the 15.35 bid → $1,535; breakeven 757.65): finish at or above 773 and they keep everything. At 760 the put pays 13.00 and they still keep 2.35 — +$235; the dead zone shelters them too. At 750: −$765. At 700: −$5,765. At zero — SPY cannot fall further, which is the only reason this seat has a maximum at all: −$75,765 per contract. Compare the short call’s open slope (Lesson 2): the short put’s loss is capped by the underlying’s floor at zero, and the cap is still the largest number in this stage. ‘Defined’ is not the same as ‘small’ — which is why Stage 7’s first credit spread sells a put only with a bought put beneath it, printing a maximum loss a budget can read.
• The same boundary as the call lesson, because it is the same contract machinery: this table is exact only at the deadline. Before expiry the put carries extrinsic value too — and puts carry a particular extra: falls usually arrive with fear, and fear inflates premiums (Stage 6’s IV lesson prices it), so a mid-fall put can show a profit the expiry table would not promise, which can evaporate if the fall stalls. Plan from the table; don’t be surprised by the journey’s prices. What happens mechanically when a put is exercised — the seller buying 100 shares at the strike — is Lesson 6’s subject, and its full morning-after procedure is Stage 8’s.

WORKED EXAMPLE — STEP BY STEP

1. The trade: buy one 773 put — same strike as Lesson 2’s call, same deadline (Nov 30, 2026), same snapshot day (SPY 778.12). Its premium is this lesson’s labeled example number, because the course’s published chain set is the call side: quoted 15.35 / 15.50. Entered the course way and logged at the ask: 15.50 × 100 = $1,550 out. Maximum loss, fixed at entry: $1,550.
2. Expiry at the snapshot price — SPY finishes at 778.12, unmoved. The put pays max(773 − 778.12, 0) = nothing: a right to sell at 773 is worthless while the market pays 778.12. The full $1,550 is gone — the policy lapsed unused, exactly like insurance on a house that didn’t burn. Nothing went wrong; nothing happening is one of the outcomes you priced.
3. SPY falls to 760 — a genuine fall, eighteen points, a bad week by any headline. The put pays 773 − 760 = 13.00 → $1,300 back; net −$250. The direction was right, the fall was real, and the trade still lost: the finish line was 757.50, and 760 is not below it. The dead zone runs downhill too.
4. SPY falls to 750: the put pays 23.00 → profit 23.00 − 15.50 = 7.50 → +$750. At 740: +$1,750. Below the breakeven the buyer gains $100 per point per contract — the call’s slope, mirrored — down to the theoretical floor where SPY itself reaches zero and the put pays the whole strike.
5. The seller’s finishes (collected 15.35 → $1,535; breakeven 757.65): everything kept at any finish at or above 773; +$235 kept at 760; −$765 at 750; −$5,765 at 700. Their maximum gain is the smallest number in this lesson and their maximum loss is the largest number in this stage — hold that shape in mind when Stage 6 explains why put premiums carry a fear tax, and when Stage 7 refuses to sell this seat unfenced.

THE INSURANCE READING — WHAT PERMANENT PROTECTION COSTS

Price the protection habit honestly, on this lesson’s own numbers: insuring 100 shares of SPY (worth $77,812 at the snapshot) down to a 773 floor for 52 days costs the example premium, $1,550 — about 2.0% of the position. Renewed back-to-back all year, that is 365 ÷ 52 ≈ seven policies — roughly $10,900, or about 14% of the position, every year, in years when nothing burns. No equity return stream survives a permanent 14% toll. That arithmetic — not bravado — is why this course treats puts as tools for windows of risk and as defined-risk trades with deadlines and exits (Stages 7–8), never as a permanent setting. Insurance is bought against a season, not against life.

COMMON BEGINNER MISTAKES

• Reading a put’s profit zone as ‘below the strike’. Below 773 the put has value; below 757.50 the buyer has profit. The 15.50 between them is the dead zone.
• Buying protection after the fall. Puts are insurance, priced for visible risk: the premium rises with the danger everyone can already see (Stage 6’s IV). The policy is cheapest when it feels unnecessary.
• Assuming the short put is safe because ‘SPY can’t fall far’. A 73-point fall — a bad quarter, not the end of the world — bills its seller $5,765 per contract; the maximum is $75,765.
• Treating the put as a share substitute with ‘limited risk’ and forgetting the deadline. It is 100-share exposure with an expiry date: the fall must arrive by Nov 30, not eventually.

CHECK YOURSELF

DO IT — BUILD THE PUT’S TABLE ON PAPER

From the same live chain row you used for Lesson 2’s practice, take the put at the same strike as your call. Note its ask, compute its breakeven (strike − ask), and write its three finishes: at today’s SPY price, at the breakeven, and twenty points below the strike. Beside the table, write the seller’s maximum gain and maximum loss for that row. Two tables, one strike, four seats — the whole of Stage 5 so far, in your own numbers.