Question

Rishab is writing a put option on a stock with a strike price of $78 and an option premium of $2.50. What price would the stock need to stay above for him to make a profit?

Answer 1

Rishab will make a profit writing a put option if the stock price remains above $75.50, which is the strike price of $78 minus the option premium of $2.50.

Step-by-step explanation:

The student's question asks what price a stock needs to stay above for Rishab to make a profit when he is writing a put option with a strike price of $78 and an option premium of $2.50. To determine this break-even price, we need to consider both the strike price and the premium received for the put option.

When writing a put option, the writer (Rishab) receives the premium upfront. If the stock price stays above the strike price, the option will not be exercised, and Rishab will keep the premium as profit. Therefore, to calculate the break-even price for Rishab, we subtract the option premium he received from the strike price:

Break-even price = Strike Price - Option Premium

Break-even price = $78 - $2.50

Break-even price = $75.50

For Rishab to make a profit, the stock price must stay above $75.50.