ok
it's called a put, not a put option.
buying a put gives you the right, not the obligation to sell a security at a specified price
example:
you own 1 April 25 Put on XYZ
Means, you have the RIGHT, not the OBLIGATION (at your discretion) to sell 100 shares of XYZ at $25.00 up until the close of business on the third friday (technically saturday) of April( the 20th)
* So say you buy that put at .30 (which is the principal... you pay principal * 100 for each option contract, so you pay $30 for that) today... you have until April 20th to exercise that.
* Today, XYZ is trading at 25.15. You can go go out and short the security (or sell it if you are long) at 25.15, so the option really isn't worth anything since it's better to sell something for 25.15 than to sell it for 25.00...
* Say on April 11th, the price drops to 20 bucks. The price of that option will have an intrinsic value of $5 (the difference b/w the contract and current trading price) + the time premium (which is basically the amount of money (the market sets this price on it's own, almost automatically)) which is what the market thinks the stock will do until the put's expiration.
It doesn't get much easier than that.
Most people don't exercise the option (i.e. (if you are naked / uncovered, go on the market buy the security, or if you are covered take from your inventory) and sell it at that price [with a put]), they just offset it, by selling it on the options market, which, in a perfect market would result in a very similar number to buying/selling the actual security.
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