Question

Suppose that a European put option has a strike price of $150 per share, costs $8 per share, and is held until maturity.

a) Under what circumstances will the seller of the option make a profit?

b) Under what circumstances will the buyer exercise the option?

c) Draw a diagram (or a table) illustrating how the profit from a short position in the option depends on the stock price at the maturity of the option.

Answer 1

Put option price = $8

Strike Price of Put = $150

a)

In case of Put option, Seller of the option make a profit when stock price on maturity is more than strike price of Put. Profit of Put seller is limited to Put premium (put cost).

b)

In case of Put option, Buyer exercise option when stock price on maturity is less than strike price of Put.

c)

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -