Question

You buy a put option on one unit of the underlying asset. The option has a premium of $3.50 and a strike price of $15. As the option is about to expire, the underlying asset is worth $21.70. What will your net payoff be?

Answer 1

Buying a put option gives the buyer a right ot sell. This option is opted when a buyer is bearish(expecting the price of stock to go down).

However as the underlying asset now is worth $21.70 and the option is about to expire the buyer will not exrcise the option. This is because that buyer has a right to sell the stock in the current market at $15 whereas the stock is currently selling $21.70.

Therefore, the option will not be exercise and net payoff would be just the premium amount which is $3.50.