# What does selling put option mean

The graphs clearly shows the non-linear dependence of the option value to the what does selling put option mean asset price. The seller's potential loss on a naked put can be substantial. The writer receives a premium from the buyer. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. This article needs additional citations for verification.

Trading options involves a constant monitoring of the option value, which is affected by changes in the base asset price, volatility and time decay. But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit. Unsourced material what does selling put option mean be challenged and removed. Retrieved from " https: The writer receives a premium from the buyer.

The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss. If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received. In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the option is not exercised by maturity, it expires worthless. The following factors what does selling put option mean the time value of a put option:

The most obvious use of a put is as a type of insurance. That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Moreover, the dependence of the what does selling put option mean option value to those factors is not linear — which makes the analysis even more complex.

The potential upside is the premium received when selling the option: The graphs clearly shows the non-linear dependence of the option value to the base asset price. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for what does selling put option mean the game. If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the option minus the premium received.

A buyer thinks the price of a stock will decrease. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Another use is for speculation:

Trading options involves a constant monitoring of the option value, which is affected by changes in the base asset price, volatility and time decay. Puts may also be combined what does selling put option mean other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging. A European option can only be exercised at time T rather than any time until Tand a Bermudan option can be exercised only on specific dates listed in the terms of the contract. Please help improve this article by adding citations to reliable sources.

Articles needing additional references from November All articles needing additional references. Option pricing is a central problem of financial mathematics. Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying.

Option pricing is a central problem of financial mathematics. Prior to exercise, an option has time value apart from its intrinsic value. This article needs additional citations for verification.

If the stock falls all the way to zero bankruptcyhis loss is equal to the strike price at which he must buy the stock to cover the option minus the premium what does selling put option mean. The put yields a positive return only if the security price falls below the strike when the option is exercised. A put option is said to have intrinsic value when the underlying instrument has a spot price S below the option's strike price K.