Question

If a stock is at $120 at expiration, and assuming no transaction costs, what is the profit or loss on a short put with a strike price of $140 and a cost of $5?

Answer 1

As we have a short position in the put option, we will get a premium of $5.

At expiry, the strike price is greater than the stock price at expiration. In a short put option you have an obligation to buy the stock if the buyer wants to sell it. The buyer will sell it for $140. Therefore, the loss here is = $140 - $120 = $20 loss.

Overall profit/ loss = $5 profit + $20 loss

= $15 loss

Do leave an upvote if you find this helpful. In case of any doubt please let me know in the comment section.