Question

A put option has an exercise price of $50 per share. Suppose you sell the option for $2. Draw a graph of the payout on the option as a function of the stock price. Label the graph.

Answer 1

If you have sold the put option for $2. The strike price of the put option is $ 50 so you are betting on downside of the stock and you will not be making losses till the stock moves up $ 52.

Once the stock starts to go above $ 52, you will lose . For each $ movement in upside, the loss will magnify.

If the stock starts to move downwards,then you will be able to gain on your position and you will be able to keep the required premium and gain the premium amount entirely.

the maximum gain on this position is $2 which is premium amount, and the maximum loss on this position is unlimited.