No. of Recommendations: 5
Hi XfatOx,

Also, tell me this: If you walk into a room where everyone is insuring against a bad event happening, and they're demanding $X for that insurance, why would you sell the insurance for $X when you believe that bad event is more likely to happen than the rest of the room believes?

When you sell a put you are giving the buyer of the put the right to sell his shares at a set price or strike price - Shares the buyer of the put owns. The insurance policy is for the buyer not the seller.

The premium is not set by the buyer or the seller so the analogy you are using is flawed. The premium is based on implied volatility or what the option market expects in terms of a stock's future volatility not valuation. It is computed using an option-pricing model such as the Black-Scholes option-pricing model.

I hope this helps explain it a bit.

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