Question

Ed Stall is an investor who owns 1 share of YY industries and a put option on 1 share of YY. The exercise price of the put option is $100 and YY currently trades at $99. The option premium was $3. If the price of YY at expiration is $50, the value of Stall's position is:

Answer 1

$100

Step-by-step explanation:

The reason is that the minimum value that the buyer of the put option will have is its exercise price because if I have right to sell an asset with exercise price of $100 and the market value of the underlying asset goes below $100 say $90, then I will prefer exercising the option and will receive $100. But suppose if the market price of the underlying asset goes above exercise price and is say $110 then I will benefit by selling the product in the market by receiving $110 not by exercising the put option and receiving $100.

So we can see from the above scenario, the minimum price that the put option holder can get by exercising the put option is its exercise price, hence $100 is the right answer.