NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives
Which statement best describes the writer (seller) of a put option?
The put writer has an obligation to buy the underlying at the strike price if the buyer exercises. In return the writer receives the premium. The right to sell belongs to the put buyer, and the writer's potential loss is not capped at a premium paid.
- AHas the right to sell the underlying at the strike price
- BHas an obligation to buy the underlying at the strike price if the buyer exercisesCorrect
- CHas limited risk equal to the premium paid
- DHas an obligation to sell the underlying if the buyer exercises
Explanation
A put writer receives the premium and must buy the underlying at the strike if the buyer exercises. The right to sell belongs to the put buyer. The writer does not pay a premium, so loss is not limited to it.
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