Question

ou purchase one crude oil July 40 put contract for a premium of $4.70 (per barrel). You hold the option until the expiration date when crude oil stock sells for $42.40 per barrel. You will realize a _____ on the investment. (Hint: Assume that each put covers 1,000 barrels)

a. $2,400 gain

b. $2,400 loss

c. $4,700 loss

d. $2,300 gain

e. $2,300 loss

Answer 1

A Crude Oil put option have strike price of USD 40.00 is being priced at USD 4.7000/barrel. Since each underlying Crude Oil futures contract represents 1,000 barrels of crude oil, the premium needed to be paid to own the put option is USD 4,700.

By option expiration day, the price of the underlying crude oil futures is at USD 42.40 per barrel. At this price, put option is now out of money. So, it is beneficial to lapse exercising this put option.

And loss will be limited to $4700.

so, anwer is c.$4,700 loss