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 DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.
A. When stock price is above strike price then the seller of the put option will make profit.
B. Buyer will exercise the option if the trading stock price goes below strike price.
When share prices below the strike price then put option is in the money, otherwise, it is out of money.
For put option as strike price increases, the value of premium must increase.
C. In the image.
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