NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
Which statement about an investor who writes (sells) a put option is correct?
A put writer's maximum profit is limited to the premium received. The writer collects the premium upfront and keeps all of it if the option expires worthless, while losses can be substantial if the underlying falls well below the strike price.
- AMaximum loss is limited to the premium received
- BMaximum profit is limited to the premium receivedCorrect
- CMaximum profit is unlimited
- DThe investor pays the premium upfront
Explanation
A put writer receives the premium, which is the maximum possible gain. Losses can be large if the price falls sharply, down to the strike price less premium. The writer does not pay a premium.
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