The last post talked about buying a PUT.  Also in a previous post I described how the risk/return graph changes when we take an opposite position. 

Lets use the same INTC March $12 Put (symbol NQOM).  If you buy the Put (Long the Put) your risk/reward at expiration looks like this:

$12 March 2009 INTEL Put

$12 March 2009 INTEL Put

And if you sell the Put (Short the Put) your risk/reward at expiration looks like this:
$12 March 2009 Intel Put - Short

$12 March 2009 Intel Put - Short

For this example I have assumed that you can sell the option for the same price that you can buy it.  In reality, if you look at these bid/ask prices in the previous post, you can sell the option for $0.72, a 3 cent difference.  Also, because the spread is 3 cents, it MAY be possible to buy or sell this option for $0.73 or $0.74. 
Notice that the graph is just mirrored about the x-axis.
If INTC closes above $12 at expiration, you will have a gain of $0.75, if INTC closes at $11.25, you will not gain or lose anything.  As GE goes below $11.25, you will start to have a loss, with the maximum loss being unlimited (to INTC going to $0, which would be a loss of $11.25).  And if INTC closes between $11.25 and $12.00 at expiration, you will have some gain.
If you sell the Put, also known as WRITING a Put, you have an OBLIGATION to purchase the underlying stock, in this example INTC, for $12.00 if the holder of the option exercises the option.  It is the buyer of the Option that has a choice, or option. 
I do NOT recommend writing NAKED options, because the maximum loss is unlimited.  Naked means that you do not have another position that limits the downside risk.  Understand how options work and paper trade them before taking any positions.
To be continued–
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