Question

A put has strike price of $75. The put price is $10. Which of the following statements is the least accurate?

a)The highest profit the put writer can make is $10

b)The highest profit the put holder can make is $65

c)The lowest profit the put writer can make is –$75

d)The highest payoff the put writer can make is $0

e)The highest payoff the put holder can make is $75

Answer 1

=> It is given that strike price of put option is $ 75 and the put price is $ 10. now we will look at all the options and let's see which one is least accurate:

Option a)

* When writing a put option, the maximum profit will the premium ( in this case $ 10), so the highest profit the put writer can make is $ 10 and this is option is very accurate.

Option b)

* When buying this put option, we will will be getting positive payoffs if the stock moves below the strike price (that is $ 75) and started to get profits once it moves below [(Stike price - put price ) that is in this case 75 - 10 = 65]. Suppose the stock moves downward to the least value that is 0, we will be having profit of $ 65 ( that is, payoff - premium paid , in this case 75 - 10 = 65). So, the highest profit the put holder can make is $65 and this option is also correct. ( The chances are very low and comparing to option a this is less accurate)

Option c)

* When writing this put option, we are having unlimited risk ( losses are unlimited ), when the stock price moves above $ 85 dollars we will started to get losses. suppose the stock moves upward to $ 160 our losses will $ - 75 but the thing is that the stock may even go up further $ 160. ( this option least accurate if we compare it to option a and option b)

Option d)

* When writing this put option, the highest payoff will the premium ( in this case $ 10). when the stock price move to $ 85 dollars, our payoff will be 0, but the chance of happening this is very very low. ( So far, our least accurate option is c and if we compare it to it, this option will be less accurate than that)

Option e)

* When buying this put option, we will will be getting positive payoffs if the stock moves below the strike price (that is $ 75). Suppose the stock moves downward to the least value that is 0, we will be having payoff = $ 75. so this option is also correct and more accurate than option d).

=> Therefore, the least accurate option is d)The highest payoff the put writer can make is $0.