What Is Put to Seller?
“Put to seller” delineates the process of a put option being exercised. The put writer becomes responsible for receiving the underlying shares from the put buyer at the confirm price, since being long puts gives the holder the right to sell the underlying asset.
Put to seller most often occurs when the strike price of the put is lower than the market value of the underlying security. At this point, the put customer has the right, but not the obligation, to sell the underlying asset to the option writer at the strike price.
- Put to seller refers to the make of a put option being exercised.
- When a put option is exercised, the put writer receives the underlying shares from the long put holder at the thrash price.
- A put option gives the holder the right, but not the obligation, to sell an asset at a predetermined price—the strike price—formerly the option expires.
Understanding Put to Seller
Put to seller occurs when a put buyer holds the contract to expiry or decides to practice the put option. In both cases, the put writer is obligated to receive the underlying security that the put buyer has effectively sold at the arrive at a fail price.
The profit on a short put position is limited to the premium received, but the risk can be significant. When writing a put, the writer is call for to buy the underlying at the strike price. If the price of the underlying falls below the strike price, the put writer could face a momentous loss.
If the option is exercised (often when it is deep in the money) and the writer needs to buy the shares, this will make an additional cash outlay. In this case, for every short put contract the trader will need to buy $2,500 importance of stock ($25 x 100 shares).
How a Put Option Works
A put option gives the holder the right, but not the constraint, to sell an asset at the strike price before the option expires. For example, stock XYZ is trading at $26. A trader corrupts a put option for $25 at a premium—or price—of $1.50. The option expires in three months. If the price of the XYZ drops below $25, that election is
Example of Put to Seller
Consider a situation where an investor buys put options to hedge downside risk in their status in stock A, which is currently trading near $36. The investor buys a three-month put on stock A, with a strike evaluate of $35, and pays a premium of $2. The put writer, who earns the premium of $2, assumes the risk of buying stock A from the investor if it captures below $35.
Towards the end of the three-month period, if stock A is trading at $22, the long will exercise the puts and sell amass A to the put writer, and receive $35 for each share. In this case, the put option is exercised; in other words, it is put to the seller.