What is a primary function of the writer of a put option?

What is a primary function of the writer of a put option?

• A. To limit losses on a long position
• B. To realize gains from a short position
• C. To hedge against a decline in market value
• D. To speculate on rising stock prices

Answer: (B)

The writer of a put option has the obligation to buy the underlying asset at the strike price if the option is exercised by the buyer. This strategy can be best understood in the context of expectations about the underlying asset's price. By writing a put option, the writer essentially bets that the stock price will remain above the strike price until the option expires. If the stock does in fact stay above the strike price, the writer benefits because they receive the premium from selling the option without having to purchase the underlying asset. This can be characterized as a way to realize gains from a short position because the writer profits from the premium collected if the market conditions favor their position. Given this context, the primary function of the writer of a put option aligns with the idea of achieving profit through market movements while potentially creating an obligation that can be advantageous if market trends do not decline. This is why the answer is correctly identified in the context of this question.

The writer of a put option has the obligation to buy the underlying asset at the strike price if the option is exercised by the buyer. This strategy can be best understood in the context of expectations about the underlying asset's price.

By writing a put option, the writer essentially bets that the stock price will remain above the strike price until the option expires. If the stock does in fact stay above the strike price, the writer benefits because they receive the premium from selling the option without having to purchase the underlying asset. This can be characterized as a way to realize gains from a short position because the writer profits from the premium collected if the market conditions favor their position.

Given this context, the primary function of the writer of a put option aligns with the idea of achieving profit through market movements while potentially creating an obligation that can be advantageous if market trends do not decline. This is why the answer is correctly identified in the context of this question.