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When ABC was trading at $52 per share, you wrote a put that you sold for $4.20 (for one share) on the stock of ABC with a strike price of $50, and six months until maturity. After six months, the share price of ABC is $49.What is your profit or loss? Losses should be entered as negative numbers. Do not include the $ sign and answer to the nearest $0.01.

Question

When ABC was trading at 52pershare,youwroteaputthatyousoldfor52 per share, you wrote a put that you sold for 4.20 (for one share) on the stock of ABC with a strike price of 50,andsixmonthsuntilmaturity.Aftersixmonths,thesharepriceofABCis50, and six months until maturity. After six months, the share price of ABC is 49.What is your profit or loss? Losses should be entered as negative numbers. Do not include the signandanswertothenearest sign and answer to the nearest 0.01.

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Solution

To calculate the profit or loss, follow these steps:

  1. First, remember that the put option gives the buyer the right to sell the stock at the strike price. In this case, the strike price is $50.

  2. After six months, the share price of ABC is 49.Thismeansthebuyeroftheputoptionwillexercisetheoptiontosellthestockat49. This means the buyer of the put option will exercise the option to sell the stock at 50, even though it's currently worth only $49.

  3. As the writer of the put option, you are obligated to buy the stock at the strike price of 50.So,youeffectivelypay50. So, you effectively pay 50 for a stock that's worth 49,resultinginalossof49, resulting in a loss of 1 per share.

  4. However, you initially sold the put option for $4.20. So, you need to subtract the loss from the premium you received when you sold the put option.

  5. Therefore, your net profit is 4.20(thepremium)−4.20 (the premium) - 1 (the loss from buying the stock at a higher price) = $3.20 per share.

This problem has been solved

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