A put option is a financial contract that gives the buyer the right (but not the obligation) to sell 100 shares of a stock at the strike price on or before the expiration date. The buyer pays a premium for this right. The seller (writer) of the put receives the premium and takes on the obligation to purchase the shares if the buyer chooses to exercise.
In the Wheel Strategy: Wheel traders are always sellers (writers) of put options, not buyers. They collect the premium upfront and take the obligation to buy 100 shares at the strike if the stock falls there. Because they hold the cash required to make this purchase, the position is known as a "cash-secured put."
Examples of Put Option in Action
- 1Buying a put on SPY gives you the right to sell 100 shares of SPY at $500 — used as downside insurance.
- 2Selling (writing) a put on AAPL at $180 — you collect $200 premium and agree to buy 100 shares at $180 if assigned.
- 3A put buyer profits when the stock falls below the strike; the put seller profits when the stock stays above the strike.