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Financial Derivatives
Notes difference between the strike price and Nifty-close. The profit is possible on this option can be
as high as the strike price. However, if Nifty rises above the strike of 2250, he lets the option
expire. His losses are limited to the extent of the premium he paid for buying the option.
Payoff Profile for Writer of Put Options: Short Put
For selling the option, the writer of the option charges a premium. The profit/loss that the
buyer makes on the option depends on the spot price of the underlying. Whatever is the buyer’s
profit is the seller’s lost. If upon expiration, the spot price happens to be below the strike price,
the buyer will exercise the option on the writer. If upon expiration the spot price of the underlying
is more than the strike price, the buyer lets his option expire unexercised and the writer gets to
keep the premium. Figure 8.6 give the payoff for the writer of a three month put option (often
referred to as short put) with a strike of 2250 sold at a premium of 61.70.
Figure 8.6: Payoff for writer of put option
The figure 8.6 shows the profits/losses for the seller of a three-month Nifty 2250 put option. As the
spot Nifty falls, the put option is in-the–money and the writer starts making losses. If upon
expiration, Nifty closes below the strike of 2250, the buyer would exercise his option on the writer
who would suffer a loss to the extent of the difference between the strike price and Nifty-close.
The loss that can be incurred by the writer of the option is a maximum extent of the strike price
(Since the worst that can happen is that the asset price can fall to zero) whereas the maximum
profit is limited to the extent of the upfront option premium of ` 61-70 charged by him.
Task Show with example the payoff for seller of call option at various strikes.
Self Assessment
Fill in the blanks:
1. The losses for the buyer of an option are ………………………however the profits are
potentially unlimited.
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