Put to Seller
What Is Put from Seller's point of view?
"Put to seller" depicts the course of a put option being exercised. The put [writer](/composing an-option) becomes responsible for getting the underlying shares from the put buyer at the strike price, since being long puts gives the holder the right to sell the underlying asset.
Put to seller generally happens when the strike price of the put is lower than the market value of the underlying security. As of now, the put buyer has the right, yet not the obligation, to sell the underlying asset to the option writer at the strike price.
Figuring out Put to Seller
Put to seller happens when a put buyer holds the contract to expiry or chooses to exercise the put option. In the two cases, the put writer is committed to receive the underlying security that the put buyer has successfully sold at the strike price.
The profit on a short put position is limited to the premium received, however the risk can be critical. While composing a put, the writer is required to buy the underlying at the strike price. In the event that the price of the underlying falls below the strike price, the put writer could face a huge loss.
Assuming the option is exercised (frequently when it is deep in the money) and the writer needs to buy the shares, this will require an extra cash outlay. In this case, for each short put contract, the trader should buy $2,500 worth of stock ($25 x 100 shares).
Special Considerations
How a Put Option Works
A put option gives the holder the right, yet not the obligation, to sell an asset at the strike price before the option terminates. For instance, stock XYZ is trading at $26. A trader buys a put option for $25 at a premium — or price — of $1.50. The option terminates in 90 days. Assuming the price of the XYZ dips under $25, that option is in the money and the option holder might decide to exercise the put option they purchased. The put option gives the investor the right to sell stock at $25, even however the stock may currently be trading at $24, $20, or even $1.
The option cost $1.50; the premium was $1.50. Hence, the holder's breakeven price is $23.50. If the price of the stock remaining parts above $25 — and the three months pass — the option is worthless and the holder losses $1.50 per share. A single option contract addresses 100 shares, so on the off chance that the trader bought three options, they would lose $450, or 3 x 100 x $1.50 = $450.
On the flip side, the person who composed (sold) the option has the obligation to buy shares at $25 if assigned by the long. In the event that the price of the underlying drops to $10, they actually need to deliver the put holder short shares at $25, for a $15 loss for every contract (less the premium earned). Subsequently, in exchange for the risk that option writers take on, they get the premium the option buyer pays.
The option's premium is the most that an option writer can make.
Illustration of Put to Seller
Consider a situation where an investor buys put options to hedge downside risk in their position in stock A, which is currently trading close $36. The investor buys a three-month put on stock A, with a strike price of $35, and pays a premium of $2. The put writer, who procures the premium of $2, expects the risk of buying stock A from the investor on the off chance that it falls below $35.
Close to the furthest limit of the three-month period, if stock An is trading at $22, the long will exercise the puts and sell stock A to the put writer, and receive $35 for each share. In this case, the put option is exercised; at the end of the day, it is put to the seller.
Correction — March 8, 2022: A previous rendition of this article mistakenly determined the put writer when assigned ought to sell shares, as opposed to buy shares.
Features
- At the point when a put to seller happens, the short side of the put is supposed to be assigned.
- This will most frequently happen when the put is in-the-money, meaning that the short side of the put should purchase shares at a price greater than the current market price.
- At the point when a put option is exercised, the put writer receives the underlying shares from the long put holder at the strike price.
- Put to seller alludes to the course of a put option being exercised.
- A put option gives the holder the right, yet not the obligation, to sell an asset at a foreordained price — the strike price — before the option terminates.
FAQ
Do You Have to Own a Put to Sell It?
No. Dissimilar to selling short stock, which requires borrowing existing shares to sell them, put options are derivatives contracts that are made when a buyer and a seller consent to execute. This is called selling to open a position. Of course, on the off chance that you are now long a put you can likewise sell it to close the position.
Why Sell a Put Instead of Buying a Call?
Both a long call and a short put bring in money when the underlying security increases in value. Notwithstanding, to buy a call includes paying the option's premium, which causes a cost. Selling a put, then again, brings about immediate income of its premium. Note, in any case, that a short put has limited upside potential (the premium received) yet unlimited loss potential. A long call, conversely, has limited loss potential (the premium paid) and unlimited upside potential.
What Happens When You Buy a Put?
The owner of a put option receives the right (however not the obligation) to sell the underlying security eventually (at or before the option terminates) for a pre-explicit price. Hence, on the off chance that you own a 10-strike put, you can sell the underlying at $10, even assuming that it tumbles to, say, $7 a share.
What Is a Naked Put?
At the point when someone sells a put with next to no other offsetting position, it is supposed to be uncovered, or "naked." This position can have possibly an unlimited loss if the price of the underlying ascents.
Selling's meaning could be a little more obvious.
The seller of a put option (likewise know as the "[writer](/composing an-option)" of a put). Since put options gain value when the underlying asset falls, the put seller looks to profit from an increase in the underlying's price by gathering the premium associated with a sale in a short put, and trusting the option lapses out-of-the-money (OTM) and worthless.
