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Short Put Options

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Transcript

Let's discuss short put options. Realize that a short put option is just the counterparty to somewhere as long the put option. So a long put option once again, is when someone has the right to sell at a certain price that we agreed on in the future. And then at that amount of money in the future, they will be able to buy it back at whatever that price happens to be. So in this case, we have a premium and they paid $1 for that right to sell. They paid for the premium.

And they now have the right to sell at whatever that price is. In this case, it's $100. So they're hoping that the price of the stock will go down over time, will go down over time somewhere in this area. And when that happens, they will then be able to sell still at $100. So let's say the price went down to $99. Let's go What happened is they're going to buy it at 9930 to exercise their long put option to the right to buy it.

And 99 they get to sell at 100 they collect a profit. In this case, they just break even. So, that was the long but what happens with the short again Now, if you're dealing with a person who's short the put option, well, that means they have to deal with the exact opposite transactions. So they start off collecting that profit of $1. They collect that premium and then anywhere less than that strike price, that the stock, yes, it goes down to well, they are going to be losing profit, because that means that they have to sell something at whatever that price is, but they always have to buy it back at $100. So one thing to notice is that the gain and loss is limited to a certain extent with put options.

If you are long the put option, the most amount of money that you can make is the price of the strike price. And for the person who's short, the put option, the most that you can lose is the strike price again, for the person who was short, the put option, the most amount of money they can make is the premium. And for the person who is long, the put option, the most of the amount of money that they can lose is limited to whatever that put options. So now you know how put options work when you're long and when you're short.

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