Question

The price of a stock (S0) is $75. A trader sells 6 (N) put option contracts (each contract of 100) on the stock with a strike price (K) of $78 when the option price (c) is $5. The options are exercised when the stock price (S1) is $74. What is the trader’s net profit or loss?
Solve in following 4 steps.
a) Option profit ?
b) Trader’s gain per option ?
c) Total options sold ?
d) Trader’s total gain ?

Answer 1

• Option profit = Strike Price - Stock Price on the day of exercise

=$78-$74

=$4 per option

• Trader's gain per option:

Receipt of premium on sale of option = $5

Loss on exercise of option                =-$4

Trader's gain per option                     =$1

• Total options sold = 6 contracts * 100 in each contract = 600 options
• Trader's Total Gain = 600 options * $1 gain per option

= $600