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Homework answers / question archive / Argue how American put buying/selling works
Argue how American put buying/selling works. a) How American put buying works. Buyers of a put expect the underlying stock to fall in value. In each of the following cases, what are the feasible actions of a buyer and their outcomes in terms of monetary gain or loss? Case 1: The price of the stock increases after the buyer purchased the put. Case 2: The price of the stock almost does not change. Case 3: The price of the stock decreases and the exercise price of the put is higher than the price of the stock at the expiration date. b) How American put selling works. Under the plan of selling puts, you grant someone else the right to sell 100 shares to you at the exercise price. At the time you sell, you receive a pre- mium. Like the call seller, you do not have much control over the outcome of your investment since the buyer will decide whether to exercise the put you sold him. In each of the following cases, what are the feasible actions of a put seller and their monetary results? Case 1: The price of the stock increases. Case 2: The price of the stock remains stable till the expiration date. Case 3: The price of the stock decreases and the put is in the money at the expiration
Put Option is a option giving the buyer of the option, the right but not the obligation to sell the required shares (i.e. right to sell)
Under PUT Option,
Put Writer/Put Seller has the obligation to buy / Performance is must
Put Holder/Put Buyer has the right to sell but no obligation to perform.
Exercise or Strike Price is the fixed price at which the buyer of the option can exercise hos option to Buy/Sell a share.
Expectation of PUT BUYER & PUT SELLER:-
Long Put : Person buying a Put Option - They expect price to decrease.
Short Put : Person selling a Put Option - They expect price to increase.
In the questions given above,
a)
| S. No. | Market Scenario | For Holder or Buyer of Put Option | Outcome |
| Case 1 | Market Price > Strike Price | Out of the money | He will exercise the option. Profit = Strike Price - Current Market Price - Option Premium Paid |
| Case 2 | Market Price = Strike Price | At the money | Indifferent |
| Case 3 | Market Price < Strike Price | In the money | He will not exercise the option. Loss = Option Premium paid |
b)
| S. No. | Market Scenario | For Writer or Seller of Put Option | Outcome |
| Case 1 | Market Price > Strike Price | Out of the money | Buyer will exercise option, Loss = Exercise Price - Option Premium Received |
| Case 2 | Market Price = Strike Price | At the money | Indifferent |
| Case 3 | Market Price < Strike Price | In the money | Buyer will not exercise the option. Profit = Option Premium Received |
It is worth noting that position of Put Seller will always be the opposite of Put Buyer.
For any query or clarification, please leave a comment.
