Question

krysten has written 25 european put options on ampol ltd, which is currently trading at $33.72. the option premium received is $1.15 per option contract. the strike price is set at $30. what is the total net profit/loss to krysten if ampol ltd's stock price decreases to $26.50 at the expiration date? your response must be entered as a positive (profit)/negative (loss) numerical value with 2 decimal places and excluding the dollar sign ($).

Answer 1

Krysten's total net loss from writing 25 European put options on Ampol Ltd., with the stock dropping to $26.50 at expiration, is $58.75.

Step-by-step explanation:

Krysten's total net profit or loss from writing 25 European put options on Ampol Ltd., with the stock price dropping to $26.50 at expiration, can be calculated as follows:

The intrinsic value of a put option is the amount by which the strike price exceeds the stock price. In this case, the strike price is $30 and the stock price at expiration is $26.50, so the intrinsic value per option is $30 - $26.50 = $3.50 per option contract. Since there are 25 contracts, this amounts to an intrinsic value of $3.50 * 25 = $87.50.

However, Krysten received an option premium of $1.15 per option contract upfront, which equals to $1.15 * 25 = $28.75 in total premium received.

To calculate the total loss, subtract the premium received from the total amount paid out at expiration:

Total amount paid out = 25 contracts * $3.50 intrinsic value = $87.50
Total premium received = 25 contracts * $1.15 = $28.75
Total net loss = $87.50 (paid out) - $28.75 (received) = $58.75 loss