Question

An investor buys a put option on a share for \$4.The stock price is \$45 and...

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)

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

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