Question

The price of a stock is $75. A trader sells 6 put option
contracts (each contract of 100) on the stock with a strike price
of $78 when the option price is $5. The options are exercised when
the stock price 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

a) Value of Option or Option Profit / Loss = Spot price - Strike Price

Value of Option or Option Profit / Loss = 74 - 78

Option Profit / (Loss) = (-$4) per option

b) Trader's gain per option contract = Option Profit / (Loss) + Premium

Therefore, Trader's gain per option contract = -$4 + $5

Therefore, Trader's gain per option contract = $1

c) Total options sold = 6 contracts x 100 options per contract

Total options sold = 600 options

d) Trader's total gain = $1 x 600

Trader's total gain = $600

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