Here in this article I have explained the put option by giving you an example of the put option.
Example of a Put Option on a Stock
Buy a Put: It is believed by a buyer that price of a stock will decrease. He will pay a premium which he will never get back, unless it is sold before expiration. It is the right of the buyer that he can sell the stock at strike price.
Write a put: A premium is received by a writer. If buyer has decided to exercise the option, then writer will buy the stock at strike price. If the option is not exercised by the buyer, then the writer’s profit is premium.
Assume that ‘Trader A’ (Put Buyer) purchases a put contract in order to sell 100 shares of XYZ Corp. to ‘Trader B’ (Put Writer) for $50/share. $55/share is the current price, and a premium of $5/share is payed by ‘Trader A’. If right before expiration the price of XYZ stock falls to $40/share , then ‘Trader A’ is able to exercise the put by buying 100 shares for $4,000 from the stock market, rather then selling them to ‘Trader B’ for $5,000.
