Question

You sold ten put contracts on Cross Town Bank stock at an option price per share of $0.85. The options have an exercise price of $39 per share. The options were exercised today when the stock price was $34 a share. What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $34? Ignore transaction costs and taxes.

A. -$4,150

B. $850

C. -$4,500

D. $3,500

E. $1,800

Answer 1

The student's net loss on the investment, after selling ten put contracts and having them exercised, is -$4,150, accounting for the premium received and the difference in exercise and market share prices.

"the correct option is approximately option A"

Step-by-step explanation:

The student sold ten put contracts at an option price of $0.85 per share, with an exercise price of $39 per share. When the options were exercised, the price of the stock was $34 a share.

A put option gives the holder the right to sell a stock at a specified price (the exercise price), so the holder of the put can sell shares for $39 when the market price is $34, making a profit of $5 per share.

The student sold put contracts, so they are on the other side of the transaction. For each share, there is a loss of $5 ($39 - $34). However, since they received a premium of $0.85 per share, the net loss is reduced to $4.15 ($5 - $0.85) per share. With ten contracts representing 100 shares each, the total loss is:

$4.15 loss/share * 1000 shares = $4,150 total loss

Therefore, the correct answer is A. -$4,150.