Question

A small finance company buys a European put option on Facebook
stock. The option price is $20 with a strike price of $250. The
option will expire in three months while the current spot price of
Facebook stock is $226.

a. Does the finance company have the financial right or
obligation to sell or buy the underlying share on the maturity day
of the option? Please briefly explain your answer.

b. If the spot price of Facebook share is $230 at maturity,
what is the payoff of the option? What is the net profit for the
finance company? Will the put option be exercised or not?

Answer #1

A. Buying of a put option will be providing the option holder with the right not an obligation to exercise that right.

At the maturity of the option period,the option holder will have either right to exercise the option or let it lapse if it is not profitable in nature but it is not an obligatory exercise on the part of optionholder.

1.b. payoff of the put option=[STRIKE PRICE OF THE PUT OPTION-CURRENT MARKET PRICE-PREMIUM PAID]

=[250-230-20]

=0

These options are not having any payoff at the current prices because they are not profitable, any further fall in price should be profitable.

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