<P> The seller's potential loss on a naked put can be substantial . If the stock falls all the way to zero (bankruptcy), his loss is equal to the strike price (at which he must buy the stock to cover the option) minus the premium received . The potential upside is the premium received when selling the option: if the stock price is above the strike price at expiration, the option seller keeps the premium, and the option expires worthless . During the option's lifetime, if the stock moves lower, the option's premium may increase (depending on how far the stock falls and how much time passes). If it does, it becomes more costly to close the position (repurchase the put, sold earlier), resulting in a loss . If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss . In order to protect the put buyer from default, the put writer is required to post margin . The put buyer does not need to post margin because the buyer would not exercise the option if it had a negative payoff . </P> <Dl> <Dt> Buying a put </Dt> </Dl> <Dt> Buying a put </Dt> <P> A buyer thinks the price of a stock will decrease . He pays a premium which he will never get back, unless it is sold before it expires . The buyer has the right to sell the stock at the strike price . </P>

Who purchases stock if an option is exercised