Question

JTC purchased put options on Flynn common shares on July 7, 2020, for $200 as a speculative investment. The put options give JTC the right to sell 100 shares at a strike price of $20 each. The options expire on January 31, 2021.

The following data is observed through 2020:

	Flynn Stock Price	Option Time Value
July 7, 2020	$20	$200
September 30, 2020	$18	$150
December 31, 2020	$22	$90

a. In the third quarter (July to September) of 2020, JTC records a gain in intrinsic value of?

Multiple Choice: ["$50", "$1,800", "$200", "$350", "$150"].

b. On September 30, 2020, the options are on JTC's balance sheet at a value of?     

Multiple Choice: ["$1,950", "$250", "$350", "$150"]

c. On December 31, 2020, the options are on JTC's balance sheet at a value of?  

Multiple Choice: ["$460", "$110", "$290", "$260", "$490", "$90"]         .

Answer 1

Premium Paid	200
Number of Shares	100
Strike Price	20
Expiry Date	31-Jan-21

	7-Jul-20	30-Sep-20	31-Dec-20
Stock Price	20	18	22
Option time value	200	150	90

Put options are right to sell at strike price. Will benefit if stock price goes down.

A) Gain in Intrinsic Value

= 20 - 18 = 2USD * 100 shares = 200 USD

Note: intrinsic value will not include premium paid or time value.

B) Balance Sheet Value on 30th September 2020:

= 20 - 18 = 2USD * 100 shares = 200 USD

+ Option Time value = 150 USD

Balance Sheet Value = 350 USD

Note: premium paid will be considered as expense and not deducted from balance sheet value.

C) Balance Sheet Value on 30th September 2020:

Intrinsic value will be 0 as option cannot be exercised since stock price is already over strike price.

Option Time Value = 90 USD

Hence, Balance Sheet Value = 90 USD