Question

The ABC Company expects stock prices to decrease. The current stock price is $96. The company purchases a put option, with exercise price of $93 and a premium of $3 per share. Just before the expiration, stock price rises to $91. Should the investor exercise the put option or not? What will the total payoff per share be?

Answer 1

Payoff = $2 per share.

Step-by-step explanation:

In a put option, the long (the party that buy the put) will have gain on the option when the underlying asset price is lower than the excercise price of that asset (imagine the advantage that you can sell a chicken at $12 when it market price of is is only 10).

Because the stock price is $91, lower than exercise price of 93, so the company should exercise the put. Total payoff per share is 93 - 91 = $2.

Note: We dont include premium to buy the put here because the question asking about payoff. We on include premium in calculations when the question is about profit.