Question

You have purchased a put option on Pfizer common stock. The option has an exercise price of $50 and Pfizer’s stock currently trades at $52. The option premium is $0.50 per contract. a. What is your net profit on the option if Pfizer’s stock price does not change over the life of the option?

Answer 1

Net Loss = $0.50

Net Profit = $3.5

Step-by-step explanation:

SOLUTION

a. the first step is to calculate the Net Profit Since stock price is smaller than stock price, option will not be exercised. there will also be a loss in the Premium paid. Hence, net loss will be $0.50

Net Loss = $0.50

b. the second step is calculating the Net Profit Net Profit = [Profit from exercise — Option Premium] Net Profit = [(127 - S23) — $0.50]

Net Profit = $3.5

Answer 2

net loss of $50

Step-by-step explanation:

A put option gives the investor the right to sell the stock at a certain price, in this case the put option's exercise price is $50, but the stock is trading at $52, so you should not exercise it because by doing so you will lose money. If the stock price doesn't change, you will not exercise the put option at all and will have lost only $50 (= $0.50 x 100 stocks).