Question

You are long 6 contracts of 2-yr put option on QQQ with a strike price (K) of $200. What will be your payoff at expiry if QQQ price at expiry (S_T) is $250?

Answer 1

A long contract of a put option is basically buying a put option which gives the buyer the right, but not obligation to sell the underlying security (in this case QQQ) at a pre-determined price which is called the strike price (in this case $ 200). The buyer of the put option is of the opnion that the underlying security would go down in value in the future and hence wants to take advantage of it by buying a put option.

To buy the put option, the buyer has to pay some premium for each put contract, lets assume it be to $ 20/contract in this case. So the buyer would have paid, $20*6 = $ 120 for the 6 contracts, which gives him a right to sell 6 contracts of QQQ at $ 200 each at the expiry.

No, since at the expiry, the QQQ is trading at $ 250, it doesn't make sense to sell at $ 200, since it is out of the money. So the option buyer will not make any money out of this contract and instead he loses his premium amount which he has spend for buying the contracts in the first place.

Hence his payoff is a loss of Option Premium * No. of Contracts (in this case, $ 20*6 = - $120).

On a long put option contract, whenever Strike price < Expiration price, then we make a loss = Premium paid