Figure 19‐5 illustrates the profit–loss position for the seller of a put. Assume that a six‐month put is sold at an exercise price of $50 for a premium of $4. The seller of a naked put receives the premium and hopes that the stock price remains at or above the exercise price. The seller begins to lose money below the breakeven point ($50 − $4 = $46). Losses could be substantial if the price of the stock declines sharply. The losses increase point for point as the stock price declines.

Figure 19‐5

Transcribed Image Text:

Gain $ Loss 20 10 4 O -10 -20 10 20 Breakeven point 30 40 Market price 46 50 Write a put 60 70