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Draw and explain the payoff diagrams for purchaser and seller of a put option

Draw and explain the payoff diagrams for purchaser and seller of a put option

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Answer #1

The put option buyer :

Here , the investor will pay an upfront premium ($3 for example) , as the stock price falls below $15 ( which is the exercise price). The put option holder will start benefiting.

profit = (Exercise price - Stock price)

Seller of a put option:

In this strategy, the option seller, receives a premium ($5 for example), as the stock price falls below the exercise price (say $15), the put option seller will start losing money.

He will profit, when the stock price will rise, as a result the option holder will not exercise his option and the option will expire worthless and i will just earn the premium amount.

The pay off diagrams of the put option buyer and put options seller are as depicted below:

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