what if the investor did not own the spy units and the put option was purchased purely as a speculative trade in this case exercising the put option would result in a short sale of 100 spy units at the 425 strike price the investor could then buy back the 100 spy units at the current market price of 415 to close out the short position 
the net profit on this trade can be calculated as spy short sell price spy purchase price put purchase price number of shares or unitsprofit 425 415 2 80 100 720exercising the option short selling the shares and then buying them back sounds like a fairly complicated endeavor not to mention added costs in the form of commissions since there are multiple transactions and margin interest for the short sale but the investor actually has an easier option for lack of a better word simply sell the put option at its current price and make a tidy profit the profit calculation in this case is put sell price put purchase price number of shares or units 10 50 2 80 100 770there s a key point to note here selling the option rather than going through the relatively convoluted process of option exercise actually results in a profit of 770 which is 50 more than the 720 made by exercising the option why the difference because selling the option enables the time value of 0 50 per share 0 50 100 shares 50 to be captured as well thus most long option positions that have value prior to expiration are sold rather than exercised for a put option buyer the maximum loss on the option position is limited to the premium paid for the put the maximum gain on the option position would occur if the underlying stock price fell to zero the majority of long option positions that have value prior to expiration are closed out by selling rather than exercising since exercising an option will result in loss of time value higher transaction costs and additional margin requirements writing put optionsin the previous section we discussed put options from the perspective of the buyer or an investor who has a long put position we now turn our attention to the other side of the option trade the put option seller or the put option writer who has a short put position contrary to a long put option a short or written put option obligates an investor to take delivery or purchase shares of the underlying stock at the strike price specified in the option contract assume an investor is bullish on spy which is currently trading at 445 and does not believe it will fall below 430 over the next month the investor could collect a premium of 3 45 per share 100 shares or 345 by writing one put option on spy with a strike price of 430 if spy stays above the 430 strike price over the next month the investor would keep the premium collected 345 since the options would expire out of the money and be worthless this is the maximum profit on the trade 345 or the premium collected conversely if spy moves below 430 before option expiration in one month the investor is on the hook for purchasing 100 shares at 430 even if spy falls to 400 or 350 or even lower no matter how far the stock falls the put option writer is liable for purchasing the shares at the strike price of 430 meaning they face a theoretical risk of 430 per share or 43 000 per contract 430 100 shares if the underlying stock falls to zero for a put writer the maximum gain is limited to the premium collected while the maximum loss would occur if the underlying stock price fell to zero the gain loss profiles for the put buyer and put writer are thus diametrically opposite 