Put Options Explained
Forbes,
There are two reasons why an individual or institution might buy a put option;
(a) to protect a stock position (i.e. a protective put)
Let's say that I hold (i.e. am long) a stock currently priced at $100. Now, let's say that the lowest price that I want to receive for that stock at some stage in the future (strike date) is $80 (strike price). I could pay a premium to lock in that price via buying a put option. I am buying the right, but not the obligation, to sell that stock at $80 on a certain date in the future. As a result, I have put a "floor" under my stock. Ideally, of course, I don't use (exercise) that option at expiry. I would prefer if the stock rises in value and I can sell the security to the market at a higher price!
(b) to make a return in a falling market
A long put option is an insurance contract, as described above. Therefore, the more risky the scenario insured, the more valuable the insurance contract or "floor" is. As a result, if the stock is falling, the price of the put option goes up. This is how you can money from the way you put it;
"I thought the idea was you buy the PUT option and then sell it back before it expires and pocket the difference."
There is one other thing to consider here and that is time value. As time passes, the value of the option falls since the contract is for a limited time only (just like an insurance policy).
As a result, in order to make money from buying put options, the stock not only needs to fall, but fall a signficant amount so that it doesn't undercompensate for the passage of time.
This is just one, but there are many, many options strategies that one can use for any type of market condition!