Put options are similar to call options, except that they work in the opposite direction. Instead of buying the right to purchase stock under or at a particular price, these stocks allow the buyer to sell the stocks at or above a particular price. Essentially, you should buy put options if you own stock and you are worried about the price going down.
The writer of the put option will be obligated to purchase the stock at the strike price even if the price has dropped well below that limit when the put option buyer exercises the option. However, the buyer is not obligated to ever sell the stock at the strike price. Therefore, if the price of the stock goes up above the option price, then it is probably a good idea not to exercise the option.
The simplest way to explain this is that the person who has stock to sell will buy the option. The person who is selling the option is interested in buying the stock in question.
There are two different kinds of put option styles depending on which stock market you are buying or selling the put options in. These styles are the American put option and the European put option, and the differences have to do wit h when you are allowed to exercise the put option that you have purchased.
For the American put option, you can exercise your option at any point in time before it expires. This means that if your stock drops drastically in price and you do not think that it will recover any time soon, you can exercise the put option that you purchased and sell the stock at the strike price, even if the real value of the stock is much lower. This is a good way to cut your losses if the stock is devaluing.
For the European put option, however, you have to wait until a short period of time that occurs just before the option expires.
The best reason to purchase put options is if you are worried about your portfolio and are looking for a way to minimize your risk.