Example: Conventional stock vs put option on stock

Remember: An option to sell a share is also called a put option. So for example the buyer of a put option expects that the price of the stock would fall. Therefore the put option on this underlying stock would enable him to sell this stock (in case the price of the stock really falls) at the higher strike price of the put option.

Example 1: Stock price drops from 10 to 9 Euro. You bought it at a price of 9, therefore, you lose one euro.

Example 2: Stock price (underlying) drops from 10 to 9 Euro. You bought a put with a strike price of 10 Euro. Therefore you can still stell your stock for 10 Euro and don’t lose anything (let’s ignore the premium for the put).