SIE practice questionhardOptions — Short Put
An investor writes (sells) 1 XYZ Dec 70 put at $5. What is the investor's maximum potential loss?
- AUnlimited
- B$6,500✓ Correct answer
- C$500
- D$7,000
Explanation
Why B — $6,500
Maximum loss for a short put = strike price - premium received (if stock goes to $0, the writer must buy at $70). Max loss = ($70 - $5) x 100 = $6,500. The put writer is obligated to buy stock at $70 if assigned, and the worst case is the stock going to zero. Maximum gain is the $500 premium received. Breakeven = $70 - $5 = $65.
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