Example of a put option
Let’s say that you thought that the share price of company ABC was going to fall from its current price of CHF 30, and so you decide to open a put option with a strike price of CHF 25. For stock options, each contract is worth the equivalent of 100 shares, but the price is usually quoted for one share.
When dealing options, there is always a premium to be paid. If the premium of this option was CHF 1 per share, your total premium is CHF 100.
If the price of ABC stock did fall, to a market price of CHF 20, you could execute your right to sell the stock for the agreed strike price of CHF 25 a share.
To calculate the profit, you subtract the market price from the strike price, giving you a profit of CHF 5 per share. Since put options come in lots of 100 shares, you multiply that CHF 5 per share profit by 100, which yields a gross profit of CHF 500. After deducting the CHF 100 premium, you would be left with a net profit of CHF 400.
However, if the market had moved against you, you could let the option expire and your maximum loss would be cost of the initial CHF 100 premium.