Cant understand

Suppose
 a trader writes a put option on the Reliance stock with a strike price 
of INR 800 and receives a premium of INR 30. What is his profit or loss 
at expiry when the stock is trading at INR 840?

Ans is 30 profit

A trader writes put option of INR 800, and received premium of Rs. 30/-.

Imagine a buyer who has bought it. The buyer paid Rs. 30/-



Scenario 1 :

Suppose - If expires at 750, then the premium will be (Spot Price - Expiry Price), so Rs. 50/-

The buyer receives Rs. 50/- (i.e. Rs. 20/- profit as he already paid premium of Rs. 30/-)

The seller will need to pay Rs. 50/- (i.e. Rs. 20/- loss as he has received Rs. 30/-, and end up paying Rs. 50/- back)



Scenario 2 :

Suppose - If expires at 840, then the option expired WORTHLESS (as Expiry Price > Spot Price), so Rs. 0/-

The buyer loses his whole premium of Rs. 30/-

The seller keeps the whole premium of Rs. 30/- (which is received already). So that's the profit of Rs. 30/-



cheers,

Mangesh

Well explained ???