Question

The price of a stock (S0) is $75. A trader sells 6 (N) put option contracts (each contract of 100) on the stock with a strike price (K) of $78 when the option price (c) is $5. The options are exercised when the stock price (S1) is $74. What is the trader’s net profit or loss?
Solve in following 4 steps.
a) Option profit = K – S0 ___________________________________________________
b) Trader’s gain per option = c – (K – S0) ____________________________________
c) Total options sold = N x 100 _____________________________________________
d) Trader’s total gain = b x c _________________________________________________

Answer 1

Dear Student,

Please note the solution -

a) Option Profit = K - So

                            = 78-74 ($ 74 is the price when option is exercised.$ 75 was price when stock purchased)

                            = $ 4

b) Trader's Gain per option = c – (K – S0)

                                            = 5-4

                                            = $ 1

c) Total options sold = N x 100

                                   = 6 * 100

                                   = 600 Contracts

d) Trader’s total gain = b x c

                                   = $1 * 600

                                   = $ 600

$ 600 is the total gain of the trader from sell of the put option.

Hope you understand the solution.

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