put option

What happens if you buy a stock hoping it rises, and instead the whole market turns against you overnight, can you protect yourself before it happens rather than after?

That is exactly the question a put option answers. It is a contract that gives you the right, though not the obligation, to sell a stock at a price you fixed today, even if the market price later falls well below that.

Say you hold shares in a company on the Nigerian Exchange, perhaps Dangote Cement, and you are worried that an upcoming election or a change in cement pricing policy might knock the share price down. You could buy a put option that lets you sell your shares at ₦300 each, no matter how low the market later drops. If the price falls to ₦250, you still sell at ₦300, and the option has done its job. If the price rises instead, you simply do not use the option, and your only loss is the small fee you paid for it, called the premium.

In the United Kingdom, fund managers holding shares in a company like Tesco often buy puts before a big announcement, such as a trading update that could go either way. It is the same idea as paying for car insurance. You hope you never need it, but you sleep better knowing it is there.

For someone abroad sending money home and also investing in Nigerian stocks through an app, a put option can feel like a safety net for the naira value of that portfolio during uncertain months, though these contracts are still fairly rare in Nigeria's market compared with the United States or United Kingdom, where they trade freely and cheaply.

The put is the mirror image of a call option, which gives you the right to buy rather than sell. Together they let investors bet on, or protect against, both directions a price can move.