The Put Option Buying
The view on markets should be bearish as opposed to the bullish view of a call option buyer.
The put option buyer is betting on the fact that the stock price will go down (by the time expiry approaches)
In a put option agreement, the buyer of the put option can buy the right to sell a stock at a price (strike price) irrespective of where the underlying/stock is trading at.
Remember this generality – whatever the buyer of the option anticipates, the seller anticipates the exact opposite, therefore a market exists.
The party agreeing to pay a premium is called the ‘contract buyer’ and the party receiving the premium is called the ‘contract seller’
Put option buyer is profitable only when the underlying declines in value
IV (Put Option) = Strike Price – Spot Price
P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
The breakeven point for the put option buyer is calculated as Strike – Premium Paid