In the first scenario, the stock price falls below the strike price ($60/-), and hence, the buyer would choose to exercise the put option Put Option Put Option is a financial instrument that gives the buyer the right to sell the option anytime before the date of contract expiration at a pre-specified price called strike price. #1 – The Stock price of BOB falls below and trades at $60/- (option expires deep in the money) Let’s assume three scenarios of movement of BOB share at expiration and calculate the Payoff of Mr. XYZ expects that the shares of BOB to trade above $65/- ($70 – $5) till the expiry of the contract. XYZ, has sold a lot of put options to Mr. Here, the strike price is $70/- and one lot of put contract is of 100 shares. Suppose share of BOB trades at $75/- and it is one month $70/- put trade for $5/. Thus, in contrast to the call option writer, the put option writer has a neutral or positive outlook on the stock or expects a decrease in volatility. The seller, in return, earns a premium, which is paid by the buyer and committing to buy the shares at the strike price. Whereas, in writing a put option, a person sold the put option to the buyer and obliged himself to buy the shares at the strike price if exercised by the buyer. Writing put options, also referred to as selling the put options.Īs we know, the put option gives the holder the right but not the obligation to sell the shares at a predetermined price. Explanationīy definition, Put options are a financial instrument that gives its holder (buyer) the right but not the obligation to sell the underlying asset at a certain price during the period of the contract. Writing put options is making the ability to sell a stock, and trying to give this right, to someone else for a specific price this is a right to sell the underlying but not an obligation to do so.
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