Since we’ve already taken a hypothetical example with a house, now let’s take a real-life example with real stock.
Say INTC (Intel) closes at $50 showing a downward trend. A trader thinks that the trend will continue in the upcoming weeks and buys a put option in INTC with an expiration date in the next 2 weeks. The strike price of the put is $50, and the trader pays $2.50 to buy the option (a premium of $250).
After a couple of weeks, INTC actually loses value and ends up at $45. This will generate a profit for the trader because now their put option can be used to sell 100 shares of stock at $50/share, which is $5 higher than the current share price. Because of that, the put’s value will be at least $5.00, or have a premium of at least $500. In this scenario, the trader will have doubled their money from the decrease in the share price. The trader can simply sell the put option at the now higher price to secure profits on their options trade.
Let’s take another example but this time with a different stock, say NVDA (Nvidia) is trading at $485 and a trader buys a put option with a strike price of $485 in NVDA because they think the stock will sink in the future.
To their surprise, NVDA ends up climbing up to $500, and is well above the put option’s strike price of $485 on the expiration date. In this case, the put option that was bought by the trader earlier will become worthless. The trader would not want to sell a $500 stock at the strike price of $485, and the put option’s price would reflect the lacking value of that ability.