The best reflection of the exposure position of a writer of a put option is option c. The maximum profit to the writer is limited to the extent of the premium paid.

Here's why:

When you write a put option, you are selling someone else the right to sell a stock to you at a predetermined price (the strike price). If the market price of the stock falls below the strike price, the buyer of the put option can exercise their right to sell the stock to you at the higher strike price.

The premium is the fee you receive for writing the put option. This is your maximum profit because it's the most you can earn from the transaction. If the buyer never exercises their option (i.e., the market price of the stock stays above the strike price), you keep the premium and don't have to buy the stock.

If the buyer does exercise their option, you have to buy the stock at the strike price, which is higher than the market price. But you still keep the premium. So, your profit is the premium minus the difference between the strike price and the market price of the stock.

Therefore, the maximum profit to the writer is limited to the extent of the premium paid.

Question

The best reflection of the exposure position of a writer of a put option is option c. The maximum profit to the writer is limited to the extent of the premium paid.

Here's why:

When you write a put option, you are selling someone else the right to sell a stock to you at a predetermined price (the strike price). If the market price of the stock falls below the strike price, the buyer of the put option can exercise their right to sell the stock to you at the higher strike price.

The premium is the fee you receive for writing the put option. This is your maximum profit because it's the most you can earn from the transaction. If the buyer never exercises their option (i.e., the market price of the stock stays above the strike price), you keep the premium and don't have to buy the stock.

If the buyer does exercise their option, you have to buy the stock at the strike price, which is higher than the market price. But you still keep the premium. So, your profit is the premium minus the difference between the strike price and the market price of the stock.

Therefore, the maximum profit to the writer is limited to the extent of the premium paid.

Knowee AI · Accepted Answer

The best reflection of the exposure position of a writer of a put option is option c. The maximum profit to the writer is limited to the extent of the premium paid.

Here's why:

When you write a put option, you are selling someone else the right to sell a stock to you at a predetermined price (the strike price). If the market price of the stock falls below the strike price, the buyer of the put option can exercise their right to sell the stock to you at the higher strike price.

The premium is the fee you receive for writing the put option. This is your maximum profit because it's the most you can earn from the transaction. If the buyer never exercises their option (i.e., the market price of the stock stays above the strike price), you keep the premium and don't have to buy the stock.

If the buyer does exercise their option, you have to buy the stock at the strike price, which is higher than the market price. But you still keep the premium. So, your profit is the premium minus the difference between the strike price and the market price of the stock.

Therefore, the maximum profit to the writer is limited to the extent of the premium paid.

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