# Calculate payoff for put option. The idea is to have one calculation working for both calls and puts, with the option type (call or put) as another user input. Let's place this new input in cell C3: At the moment cell C8 always calculates call payoff, using the formula which we have created in the previous part: =MAX(C6-C4,0)-C5. We must change this formula.

## Calculate payoff for put option. Exercising a call option is the financial equivalent of simultaneously purchasing the shares at the strike price and immediately selling them at the now higher market price. A Put option represents the right (but not the requirement) to sell a set number of shares of stock (which you do not yet own) at a pre-determined 'strike.

This page explains short put option payoff. You can find similar pages for the other basic option positions here: A short put option position is a bullish strategy with limited upside and limited but usually very high risk. The position is initiated by selling a put option with the intention to buy it back later at a lower price or waiting until expiration and hoping it will expire out of the money.

See the payoff chart below:. The payoff is inverse of long put position , which is the other side of your trade. Below the strike price your profit declines in proportion with the underlying price. In this example we have sold one contract of a 45 strike put option for the price of 2. The maximum you can gain from a short put trade is the amount you receive at the beginning when selling the put. If the option expires worthless, there is no more cash flow from the trade and you keep all the initial cash, which is also your total profit.

The worst case scenario is when the underlying price drops to zero. Because the underlying is now worthless, you lose the amount equal to the strike price per share.

Total loss from the trade is therefore equal to the strike price less the initial amount you have received when selling the put. The risk-reward ratio is usually quite unfavourable with a short put position, as the maximum possible loss is usually much higher than potential profit of the trade.

If you have seen the explanation of long put option payoff formulas , you will find the short put payoff formulas are exactly the same, only with opposite signs , as you are now taking the other side of the trade.

The break-even point of a short put position is exactly the same as long put break-even. This particular short put trade is profitable if the underlying ends up above If you don't agree with any part of this Agreement, please leave the website now.

All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong. Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time.

Short Put Payoff Diagram A short put option position is a bullish strategy with limited upside and limited but usually very high risk. See the payoff chart below: Short Put Maximum Profit The maximum you can gain from a short put trade is the amount you receive at the beginning when selling the put.

Short Put Maximum Loss The worst case scenario is when the underlying price drops to zero. Short Put Risk-Reward Ratio The risk-reward ratio is usually quite unfavourable with a short put position, as the maximum possible loss is usually much higher than potential profit of the trade. Short Put Payoff Formulas If you have seen the explanation of long put option payoff formulas , you will find the short put payoff formulas are exactly the same, only with opposite signs , as you are now taking the other side of the trade.

There are again two components of the total profit or loss: Short Put Payoff Summary Short put strategy is directional and bullish. It is also a short volatility strategy, as the value of a put option declines when volatility decreases, which means your short put position becomes more profitable.

You want the underlying price to end up above the strike price, so the put option expires worthless and you keep the entire premium.

Short put strategy has limited upside, equal to the cash you get when selling the put option in the beginning. This is the maximum you can gain from the trade. It has limited risk unlike a short call trade whose risk is unlimited , equal to the strike price less the initial option price. However, in most cases the option price is much lower than the strike price, which means the maximum possible loss is typically much higher than the potential profit.

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