Question

Suppose that a June put option on a stock with a strike of $60 costs $4 and is held until June. Under what circumstances will the option be exercised? Under what circumstances will the holder of the option make a gain? Under what circumstances will the seller of the option make a gain? What is the maximal gain that the seller of the option can make? Under what circumstances will the seller of the option make the maximal gain?  

Answer 1

PUT OPTION: The option which gives buyer a right to purchase at a future date from the option seller.

Given Strike Price (K) = 60$

put option price (P) = 4$

Settlement price = S

(1) In case of put option, whenever the Settlement Price goes below the strike price the option buyer can excercise the contract and sell it to the option seller at strike price.

S < K, where K is to equal to zero

(2) The holder will make maximum gain whenever the settlement price goes as down as to zero.whenever settlement price is zero, still option buyer can sell at strike price to option seller.

S = 0 (Maximum gain)

(3) The option seller will gain when the settlement price is higher than the strike price. Since in market the price is high, the option buyer will sell it in market without excercising option. Then, the option premium would be the gain for the option seller.

(4) The maximum gain that seller can get is the option premium, when option buyer do not excercise the option.

(5) Whenever the Settlement price is higher than strike price, the seller can make maximal gain.