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In: Accounting

Suppose that a September put option with a strike price of $85 costs $13.0. Under what circumstances will the seller (or writer) of the option

Suppose that a September put option with a strike price of $85 costs $13.0. Under what circumstances will the seller (or writer) of the option earn a positive or zero profit? Let S equal the price of the underlying. Group of answer choices

S < 85

S > 85

S > 72.0

S < 98.0

S < 72.0

 

 

Solutions

Expert Solution

The right option is S > 72.0.

 

Explanation:

A put option holder exercises their option when the stock price on exercise date is lower than the strike price. If stock price on exercise date is higher than strike price, then the put option lapses and writer of put option has a profit of the premium paid. 

 

For a put option writer, 

break even point = Strike Price - Premium Paid

                                = $85 - $13 = $72

 

That is zero profit. 

 

When stock price on exercise day, I.e, S > 72 then the writer of put option has profit. 

When stock price on exercise day, I.e, S > 72 then the writer of put option has profit.

Junaid answered 2 years ago
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