Question

The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit or loss is A. Gain of $1,000 B. Loss of $2,000 C. Loss of $2,800 D. Loss of $1,000

Answer 1

D. Loss of $1000

Step-by-step explanation:

Given that

A trader sells 200 put options at strike price of $120

And options are exercised when stock price is $110

Thus, payoff that must be made on option

= 200 × (120 - 110)

= 200 × 10

= $2000.

Also,

Amount received for the option

= price of option × quantity

= 5 × 200

= $1000

Therefore,

Trader's net loss = 2000 - 1000

= $1000