Question

What is the total profit/loss for 9 contracts on a $1,310 put option on Alphabet Inc. (GOOG) stock if the option is exercised when the underlying stock price is $1,349.19 and the option premium is $26.65? Assume that the investor is long the put option.

Answer 1

No. of Contracts = 9

Strike Price (k) = $ 1,310

Underlying Stock Price at the time of Expiry = $ 1,349.19

Option Premium = $ 26.25

A put option is a contract that gives its holder the right to sell a set number of equity shares at a set price, called the strike price, before a certain expiration date.

If the option is exercised, the writer of the option contract is obligated to purchase the shares from the option holder.

Exercising the option means the buyer is opting to take advantage of the right to sell the shares at the strike price.

Investor purchased nine $1,310 put options on GOOG. So, this gives him the right to sell shares of GOOG at $1,310 before the expiration date.

But, the shares are trading at $ 1,349 i.e., the investor can sell the shares in external market for an amount above the strike price. (as the put option is out-of-money)

Hence, the investor will not exercise the put option.

Loss on account of Options = $ 26.25

Investor realizes a gain on the option if the price of GOOG stock falls below the $1,310 strike price.

In other words, Investor is protected from the stock price falling below the $1,310 strike price of the put option.