Question

An investor buys a put option on a share for $4.The stock price is $45 and the strike price if $40.Explain under what circumstances the investor makes a profit and under what circumstances will the option be exercised. Sketch a diagram showing the variation of the investor's profit with the stock price at the maturity of the option. (Please explain the answer in detail, thank you)

Answer 1

When the stock price on the expiration date is less than $37 then the investor will make a profit. In this scenario the gain by exercising the option is greater than $4. The option must be exercised if the stock price is less than $40 at the time of maturity of the option. For further analyzing the investor’s profit refer the schedule and the diagram mentioned here below:

Stock Price	Put Option Value	Profit
0	40	36
10	30	26
20	20	16
30	10	6
40	0	-4
50	0	-4
60	0	-4
70	0	-4