Question

I sold a put option on an IBM stock. The option expires in 6 months and...

  1. I sold a put option on an IBM stock. The option expires in 6 months and has a strike price of $125. The option premium is $5. Which of the following statements is true?

    I paid $5 for this option.         

    If the buyer of this option decides to exercise this option, I will have to buy an IBM share from him at a price of $125.

    If the buyer of this option decides to exercise this option, I will have to sell an IBM share to him at a price of $125.

    I have the right to sell an IBM stock at the price of $125.
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Answer #1

A put option is a right to sell the underlying stock at the pre-determined price which is the strike price. The buyer of a put option buys the right to sell the stock if market price at maturity is less than the strike price. So, if a put option is exercised, the seller of the put option has to buy the stock at the strike price. The correct option is Option (b). "If the buyer of this option decides to exercise this option, I will have to buy an IBM share from him at a price of $125."

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