What Occurs when Naked put Options are Sold?

When a put option contract is sold, you are literally getting involved in a required contract where you are then under the obligation of carrying out the terms that have been given in the deal. Put sellers place themselves in bullish circumstances for the stock they sell put options in. the terms of a put sell contract obligate the seller to purchase one hundred shares for instance, of a certain stock such as XYZ at a certain strike price, which in this case can be $20 at any time until the expiration of the option under any condition if they are needed by the buyer of the option. In the moment in which the seller sells an XYZ $20 put option for let’s say, $.50, he is pledging someone that he will buy one hundred shares of XYZ for $20 per share at any time that is, until the option expires at a certain date, no matter what, if the option buyer decides on it. Due to the fact that you are taking on the risk of purchasing XYZ for $20 per share, the buyer of the option agrees to pay you $50 now per option contract. Does this really sound like a risk though? Why in the world would a person be willing to pay you cash to purchase XYZ at a price that is cheaper than where it is currently at now? Let’s say that XYZ is trading at $22.63, so exactly how are you going to buy that at $20? And if you do purchase at $20, does this seem like a risk? What would occur if the next day, after you have purchased the $20 put option, it is decided that the company of XYZ has been violating a great number of laws and that it cannot sell any of its products anymore, obviously if this were to happen the company of XYZ would go bankrupt. So what would occur the following day? Imagine they opened their trading at $2 per share. What would occur to the put option you sold though? The buyer will obligate you to carry out the terms that were agreed upon on the contract and would make you purchase one hundred shares of XYZ for $20 while everybody else is currently purchasing them at $2. This means you have placed yourself in a situation in which you are forced to into an $18 per share loss. Therefore this is the risk you are taking on.