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The price of a stock on October 1st is $48. A trader sells a put option...

The price of a stock on October 1st is $48. A trader sells a put option contract (comprised of 200 shares) with a strike price of $40 when the option premium is $2/share. The put option is exercised when the stock price is $39. What is the trader’s net profit or loss?

Solutions

Expert Solution

Since the put option is sold, the upfront cash received by the trader = 200*2 = $400

Since the final stock price is lesser than the strike price, there is a loss to the trader (since he/she has short put)

Loss due to negative payoff = 200*(40-39) = $200

Net profit to trader = $400-$200

Net profit to trader = $200

jeff jeffy answered 2 years ago
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