Question

sampath holds two put option on coca-cola co at a strike price of $50. he paid $250 for this option. the stock is now trading at $45 per share. what is the total intrinsic value of his put option position?

a- $45

b- $10

c- $1000

d- $500

c- 250

Answer 1

Solution :

Intrinsic value of a put option is calculated as follows :

1. If Exercise Price (EP) is greater than current market price (CMP), Intrinsic value of Put option = ( Exercise Price - Current Market Price) = (EP) - (CMP)

2. If Exercise Price (EP) is less than current market price (CMP) , Intrinsic value of the Put option is Nil or zero, as the option will not be exercised.

As per the data given in the question Mr. Sampath holds two Put options on coca- cola co.

EP of a Put option = $ 50   ;   CMP of a Put option = $ 45

Since Exercise price is greater than Current market price , the option is said to be ''In the money " and the Intrinsic value of the Put option = $ 50 - $ 45 = $ 5 per Put option.

Since Mr. Sampath is holding two Put options, the total Intrinsic value of his Put option position = $ 5 * 2           = $ 10.

Thus the solution to the question is option b, which is $ 10.