Short Put: Understanding Maximum Loss
What is the maximum loss for an investor who is short 1 December 15 put at 6?
Based on the Put and the short, the investor's maximum loss is b) $900.
When using puts, the maximum loss incurred on the put's price is 15.
In this case, the Put has a premium of 6 which means that the put is limited to:
= Maximum loss - premium on put
= 15 - 6
= $9
The number of shares in a typical put contract is 100 so the maximum loss is:
= Loss per put x Number of shares
= 9 x 100
= $900
In conclusion, the maximum loss for the investor on the short position is $900.