Question

Alice and Bob own identical stock portfolios, and both of them also bought 1-yr maturity puts on the stock. Alice bought at-the-money puts for her portfolio, while Bob decided to get out-of-the-money puts. At the end of 1yr, if the market is at the same price as the beginning of the year, which of the following is true

None of the above

Bob loses less than Alice       

Alice makes a profit     

Alice loses less than Bob          

Answer 1

An out of the money put option has a strike price less than the current market price and an At-the-money put option has the strike price same as the current market price

As the premium of Put option increases with increase in strike price , the Out- of the money put option bought by Bob costs less than the At -the money put option purchased by Alice

Now, at the end of the year, market price is the same as at the beginning of the year

So both the put options are worthless (at the money as well as out -of the money)

As Bob spent less money on the put option than Alice,

Alice lost more as compared to Bob

or Bob loses less than Alice (2nd option)