What Are the Risks of Writing a Put Option?
The primary risk of writing a put option is a sharp decline in the price of the underlying cryptocurrency. If the price falls below the strike price, the writer is obligated to buy the crypto at the higher strike price from the option holder.
This means they could be forced to purchase an asset for a price significantly above its current market value. The maximum potential loss is substantial and occurs if the crypto's price drops to zero, forcing the writer to buy a worthless asset at the strike price.
Glossar
Writing a Put Option
Action ⎊ Writing a Put Option, also known as selling or shorting a put, is the action of creating and selling a contract that obligates the writer to purchase the underlying crypto asset from the buyer at a predetermined strike price on or before the expiration date.
Maximum Potential Loss
Exposure ⎊ Maximum Potential Loss (MPL) within cryptocurrency, options trading, and financial derivatives represents the theoretical worst-case financial detriment an investor could incur from a specific position or portfolio.