Question

The cost of a put option on HSB stock with a strike price of $45 is $0.93. The option has 3 months until expiration. You purchase 8 contracts. On the expiration date, the stock was valued at $46.18 a share. What is your profit or loss on the option contracts in dollars? Answer should be formatted as a number with 2 decimal places (e.g. 99.99).

Answer 1

The total loss on the option contracts would be the initial cost of the purchase, which is $744.00, because the stock price at expiration was above the strike price, rendering the put options worthless.

Step-by-step explanation:

To calculate the profit or loss from the purchase of stock options, you must consider the contract details and the stock's expiration value. A put option grants the holder the right, but not the obligation, to sell the stock at a specified strike price before or on the expiration date. Since each option contract typically covers 100 shares, 8 contracts would cover 800 shares.

The cost of a put option on HSB stock with a strike price of $45 was $0.93 per share. Therefore, the total cost for 8 contracts is:

8 contracts x 100 shares/contract x $0.93/share = $744

At expiration, the stock was valued at $46.18, which is above the strike price of $45. This means that the put options are out of the money and worthless. Therefore, the total loss is the initial cost of the purchase:

Loss = Option Purchase Cost = $744.00