A Put Option is a derivative contract granting the buyer of the contract the right, but not the obligation, to sell a specified amount of an underlying asset at a set price (strike price) within a set timeframe.
- Effects of Buying a Put Option: When you buy a put option, you anticipate a decline in the asset's price. You have the right to sell it at the strike price, regardless of the market price. Your maximum loss is limited to the premium paid. Profits increase as the asset's price drops below the strike price.
- Effects of Selling a Put Option: Selling a put option means you collect a premium, but you might have to buy the asset at the strike price if the option is exercised. Your profit is limited to the premium, but your losses increase if the asset's price dives below the strike price.
Imagine you buy a put option for Infosys shares with a strike price of ₹1,300, expiring in one month, and you pay a premium of ₹50 per share. If the share price falls to ₹1,100 during that month, you can sell your shares for ₹1,300 (the strike price) even though the market price is ₹1,100. The net profit is the difference minus the premium. However, if the share price remains above ₹1,300, your maximum loss is just the ₹50 premium you paid.
On the other hand, if you sold this put option and the price of Infosys does drop to ₹1,100, you're obligated to buy the shares at the higher strike price of ₹1,300, even though they're currently valued at ₹1,100, resulting in a loss.
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