If I have sold the Put Option: it means the buyer of this option has the right to Sell (the underlying) whenever he wants, if he wants at the pre-determined price.
If the price of the underlying in the local (cash) market is higher than the strike price (pre-agreed price), he will not exercise his right to sell to me at a lower price.
On the other hand, if the price of the underlying in the local (cash) market is lower than the strike price (pre-agreed price), he will exercise his right to sell to me at a higher price.
Example:
I have sold the Put option:
Underlying: share of ABC
Strike price: INR 50
Price of the underlying in the local (cash) market is higher, say INR 60.
In this case, the buyer of this Option (Put Option) will not exercise his option and sell to me at INR 50.
On the other hand, if the price of the underlying in the local (cash) market is lower, say INR 40. In this case, the buyer of this Option (Put Option) will exercise his option and sell to me at INR 50 – to fetch a higher price.
Situations created using Options:
