Illustration of a Put Option on stocks
Put Options on stocks also work the same way as Call Options on stocks. However, the Option buyer is bearish about the price of a stock and hopes to profit from a fall in its price. Getting back to the example of Reliance shares, assume that bad news is expected at the AGM and you believe the price of Reliance will fall from its current level of Rs 950 per share. To make the most of a fall in the price, you could buy a Put Option on Reliance, at the strike price of Rs 930 at a market determined premium of say Rs 10 per share. You would have to pay Rs 6,000 as premium (600 shares x Rs 10 per share) to purchase one Put Option on Reliance.
Here’s what you and the seller of the option derive from this transaction under various market conditions.
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