Question

Consider two put options written on ABC Inc.'s stock. The first put, P1, has an exercise price of $45. The second put, P2, has an exercise price of $25. Both puts have the same expiration date. Today is the expiration date. Both put option are out of the money. Which of the following stock price is consistent with this situation?

Answer Choices:

A) 20

B) 25

C) 35

D) 45

E) 50

Answer 1

PUt option gives the right to sell to the long party at the exercise price. It is exercised when the market price is lower than the exercise price. Put option gives the optionholder the safety of selling at the exercise price even when the market price is lower. For this reason the option holder pays a premium for it.

Now if the price in the market is any where between 25 and 45 , P1 will be in the money. When the price is below 25, both P1 and P2 will be in the money. In the money implies that the option will be exercised. At the price of 45, P1 is at the money and will still be exercised even if there is payoff is 0

But at a price of 50, both the options will be out of the money as both wont be exercised. So the correct option is E