Question

In: Finance

Suppose that a September put option with a strike price of $130 costs $12.0. Under what circumstances will the holder of the option earn a profit? Let S equal the price of the underlying.

Suppose that a September put option with a strike price of $130 costs $12.0. Under what circumstances will the holder of the option earn a profit? Let S equal the price of the underlying.

S < 130

S < 118.0

S > 130

S > 142.0

S < 142.0

Solutions

Expert Solution

The correct option is (b).

 

Explanation:

The holder of the put option has right to sell the underlying stock at the strike price if he exercise the option. So, the option would be exercised when the market price is lesser than the strike price. So, the payout would be the difference between Market price and Strike price. Besides that, a premium also is paid.

 

So, the profit would be,

Profit = Strike Price - Market Price - Premium

Profit = 130 - S  - 12 

           = 118 - S

 

So, the same would result in profit when S<118.

 

So, Correct answer is Option (B) S < 118.

So, Correct answer is Option (B) S < 118.

Junaid answered 2 years ago
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