Question

Suppose you bought one put option for one ounce of gold with a strike price of $1,550 per ounce. You paid a premium of $7 for this option and you held the option until expiration. Suppose the market price of gold is $1,500 per ounce at expiration. What is your gain or loss on the option contract?

Answer 1

Solution :

Calculation of Net Gain / Loss on the purchase of a Put option contract:

A Put option will be exercised only if, the Spot price on expiry is lesser than the Strike price of the put option.

In case of a put option the Intrinsic value is the Maximum of [ (Strike Price - Spot price on expiry) , 0 ]

As per the information given in the question we have

Strike price of Put option = $ 1,550

Spot Price on expiry of a put option = $ 1,500

Thus the (Strike Price - Spot price on expiry ) = $ 1,550 - $ 1,500 = $ 50

Since $ 50 is greater than ‘ 0 ‘ , the Intrinsic value of one put option = $ 50

As per the information given in the question we have

Premium paid per Put option contract = $ 7

Thus the Net gain / loss on the Option Contract = Intrinsic value on the Put option – Premium paid

= $ 50 - $ 7 = - $ 43

Thus the net gain on the put option = $ 43