Because you think the price of an asset is going down.
The payoff graph of a long put position is below:
Let’s re-run the three scenarios described in the previous section, this time comparing the purchase of the JAG June 30th 90 strike put for $5, against short selling one JAG token. Reiterating, the scenarios are:
1.
The price of JAG rises to $130
2.
The price of JAG remains at $100
3.
The price of JAG falls to $70
Scenario 1:
If Alice had short sold one JAG for $100, she'd lose $30 (-30%).
If she had bought the put, she would lose the $5 premium as the asset price is greater than the strike price (-100%).
Scenario 2:
If Alice had short sold one JAG for $100, she would remain flat.
If she had bought the put, she would lose the $5 premium paid for the put (-100%).
Scenario 3:
If Alice had short sold one JAG for $100, she'd make $30 (+30%)
If she had bought the put, she could exercise the put to sell JAG at $90 and buy it back for $70. After factoring in the put premium, this is a profit of $15 (+300%).
Why trade it? You think the asset is going down within a certain time frame.
Cost: The premium you pay, in this example 10 x $5 = $50.
Theoretical Max Profit: If the asset goes to zero, you make the difference between the strike and zero, minus the premium you paid, (100 - $5) x 10 = $950.
Theoretical Max Loss: The price you paid for the put, in this example $50.
Breakeven at expiration: The strike minus the price you paid for the put (100 - $5 = $95).