Question

On 10 May an investor sells a six-month put option on 1,000 shares of a stock....

On 10 May an investor sells a six-month put option on 1,000 shares of a stock. The current stock price $39 and the exercise price of the put option is $40. The price of the put option is $2.30 per share. At expiration date on 10 November, the stock price is $36.90. The option is cash settled.
(a) What is the cash flow of the investor on 10 May?
(b) What is the payoff on the option on 10 November?
(c) What is the investor’s profit/loss on the option trade?

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Answer #1

Payoff short put =MIN(stock price-strike price,0)*number of share

Profit/loss=(payoff+premium received)*number of shares

a)Cash flow of the investor on 10 May

Cashflow(premium received)=premium received*no.of shares

Cashflow(premium received)=$2.30*1000

Cashflow(premium received)=$2,300

b) Payoff on option on 10 november

Payoff short put option=MIN($36.90-$40)*1000

Payoff short put option=-3.10*1000

Payoff short put option=-$3,100

c)Profit/loss on option trade=(-3.10+2.30)*1000=-$800

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