Payoff Profile for Buyer of Put Options (Long Put) Homework Help

Payoff Profile for Buyer of Put Options: Long Put

A put option gives the buyer the right to sell the underlying asset at the strike price specified the option. The profit loss that the buyer makes on the option depends on the spot price of the underlying. If upon expiration the spot price is below the strike price, he makes a profit. The lower the spot price, the more is the profit he makes. If the spot price of the underlying is higher than the strike price he lets his option expire unexercised. His loss in the case is the premium he paid for buying the option.

Payoff Profile for Writer of Put Options: Short Put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. For selling the option, the writer of the option charges a premium. The profit loss that the buyer makes on the option depends on the spot price of the underlying. The buyer’s profit is the seller’s loss. If upon expiration the spot price happens to be below the strike price, the buyer will exercise the option on the writer. If upon expiration the spot price of the underlying is more than the strike price, the buyer gees his option expire unexercised and the writer gets to keep the premium.

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