The maximum (total) loss a writer of a stock put option can suffer is equal to: Select one: a. the strike price minus the stock price b. The strike price minus the put premium c. The strike price d. Infinity e. The strike price plus the put premium
Question
The maximum (total) loss a writer of a stock put option can suffer is equal to: Select one: a. the strike price minus the stock price b. The strike price minus the put premium c. The strike price d. Infinity e. The strike price plus the put premium
Solution
To determine the maximum (total) loss a writer of a stock put option can suffer, we need to consider the different components involved.
First, let's understand the terms used in the question. The strike price refers to the predetermined price at which the underlying stock can be bought or sold, depending on the type of option. The stock price refers to the current market price of the underlying stock. The put premium is the price paid by the buyer of the put option to the writer.
Now, let's analyze the options provided:
a. The strike price minus the stock price: This option represents the potential loss if the stock price is lower than the strike price. However, it does not take into account the put premium paid by the buyer.
b. The strike price minus the put premium: This option considers the put premium paid by the buyer, which reduces the potential loss for the writer. It is a more accurate representation of the maximum loss.
c. The strike price: This option does not consider the put premium and only represents the potential loss if the stock price is lower than the strike price.
d. Infinity: This option suggests that the maximum loss is unlimited, which is not accurate. The maximum loss is limited to the strike price minus the put premium.
e. The strike price plus the put premium: This option overestimates the maximum loss by including the put premium as a loss for the writer.
Based on the analysis, the correct answer is b. The maximum (total) loss a writer of a stock put option can suffer is equal to the strike price minus the put premium.
Similar Questions
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