The maximum loss the writer of a stock put option can suffer is equal to
A) the put premium.
B) the striking price.
C) the stock price minus the put premium.
D) the striking price minus the put premium.
E) none of these.

Question

Quizplus · Accepted Answer

The maximum loss for the writer of a stock put option is the difference between the striking price and the premium received. This is because, as the stock price decreases, the put option becomes more valuable and the writer may have to buy the stock at the striking price in order to fulfill the obligation. The maximum loss occurs if the stock price falls to zero, in which case the writer would have to pay the striking price but would still only receive the premium. Therefore, the maximum loss is equal to the striking price minus the premium.

The Maximum Loss the Writer of a Stock Put Option