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We have company ABCD trading at $50 a share Lets draw a payoff diagram for a put option with a $50 strike price trading at $10 So once again we get to draw two types of payoff diagrams One type that only cares about the value of the option at expiration. This is what you tend to see in academic settings like business schools or textbooks. And the other one will actually draw a profit and loss based-on that option position, so incorporate the price you actually paid for the option. You tend to see this more in practice. So you have a put option. Remember, this is the right to sell the stock at $50. So the stock lets say at expiration. All of these are at expiration. At expiration the stock is trading at $0, the company went bankrupt. Now its worthless. What is the put option worth? You would now go on the market, buy it for almost $0 , and then you would exercise your put option and then you would sell it for $50. So you would definitely excerise it, and youd make a lot of money the