Put Agreement

An option-to-sell agreement, or simply called put, is a contract entered into by a potential seller of company shares or securities (the “seller”) with the potential buyer of these securities (the buyer), the buyer agreeing to acquire his securities from the seller if the seller requests it. The option recorder would collect a total of $72 ($0.72 x $100). If SPY stays above the strike price of $260, the investor would keep the award-winning, as the money options mature and have no value. This is the maximum gain on trade: 72 USD or the premium collected. There are several factors to consider when it comes to selling put options. It is important to understand the value and profitability of an option contract if you are considering a market, or you may see the stock exceed the point of profitability. In general, the value of a put option decreases as time approaches expiration, due to the effects of time disintegration. The period of disintegration accelerates, as the time for an option approaches, since there is less time to make a profit from trading. If an option loses its current value, the intrinsic value remains.

The intrinsic value of an option is the difference between the exercise price and the underlying share price. If an option has intrinsic value, it is referred to as money (ITM). A put option gives the owner the right, but not the obligation to sell a stock at a set price in the future. When an investor buys a put, it expects the underlying asset to fall into the price; it can sell the option and make a profit. An investor can also write a put option to buy another investor, in which case they will not expect the share price to fall below the exercise price. The potential loss of the seller on a naked put can be significant. If the stock falls to zero (bankruptcy), its loss is the exercise price (at which it must buy the stock to cover the option) minus the premium received. The potential benefit is the premium received when the option is sold: if the share price is higher than the exercise price at expiry, the option seller retains the premium and the option expires worthless.

During the duration of the option, the option increase may increase if the stock is down (depending on the stock drop and the time that passes). If this is the case, it will be more expensive to close the position (buy back the put, sold earlier), resulting in a loss. If the share price collapses completely before the closing of the put position, the scribe may suffer potentially catastrophic losses.

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