Respuesta :
A put option is a right for the option buyer to sell the underlying share to the option seller at the strike price on the date of maturity of the option. In the given case, the investor has sold one July put option with a strike price of $40.
This means that the option buyer can sell the underlying stock to the option-selling investor at the time of the expiry of the options contract in July $40. This is what the selling investor has agreed to. In lieu of taking this risk, the option seller gets an option premium which is $3 in this case.
The option buyer will exercise the option obviously only if the stock price at the time of expiry is below $40 (If the price stays higher than $40, he would prefer to sell directly in the market). The trade will be profitable if, at the time of the expiry of the option in July, the stock price remains above 37. This is because the revenue of the option sellers from the trade is $3. So, if his costs remain below $3, the trade stands profitable for him. If the price goes below $37, the option buyer will sell the stock to him for $40 which will have a market value of less than $37 and his loss would go higher than $3, thus resulting in a net loss to him.
Selling options is a high-risk game. This is because the return is limited and can maximum be equal to the option premium. However, the risk is unlimited depending on the movement of stock price. For e.g.: if in the given case, the stock price falls to $20 by the time of expiry in July, the option buyer would exercise the option by selling the share to him for $40 and the investor's loss would be $20 (I.e. $40-$20) against the premium earned of $3.
Therefore, the risks involved are significant financial losses against the limited returns available. Since the risk-reward scenarios are not too promising, these trades are only successful overall when the odds of their success are very high.
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