Question

Suppose you write 16 put option contracts with a $80 strike. The premium is $2.40. Evaluate your potential gains and losses at option expiration for stock prices of $70, $80, and $90.

Answer 1

The potential gains and losses is computed as shown below:

= (Stock price at expiration - strike price + premium received) x 16 x 100

a. The potential gains and losses is computed as shown below:

= ($ 70 - $ 80 + $ 2.40) x 1,600

= - $ 12,160

b. The potential gains and losses is computed as shown below:

= ($ 80 - $ 80 + $ 2.40) x 1,600

= $ 3,840

c. The potential gains and losses is computed as shown below:

= ($ 90 - $ 80 + $ 2.40) x 1,600

= $ 19,840

But the maximum profit in case of writing a put option is limited to the premium received i.e.

= $ 2.40 x 1,600

= $ 3,840

So, the profit will be $ 3,840

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