What does a put option allow the holder to do?

A put option is a financial contract that grants the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price, known as the strike price, within a specified time frame. This can be advantageous for the holder if they anticipate that the price of the underlying asset will fall below the strike price. By exercising the put option, the holder can sell the asset at the higher strike price, thus potentially minimizing their losses or realizing a profit even as the market price declines.

The functioning of a put option is crucial in risk management and investment strategies as it provides a form of insurance against adverse price movements in the underlying asset. This right to sell distinguishes it significantly from other types of options, such as call options, which grant the holder the ability to buy the underlying asset instead. Thus, understanding the nature of a put option allows investors to make informed decisions about how to manage their investments and hedge against potential market declines effectively.