Question

You bought an American put option some time ago. Today it has one year left to expiration. Interest rate is 10% per year. Annual compounding applies. Strike price is $100, and stock price is $5. Which of the following is incorrect?

A. If you wait until expiration day to exercise the put option, the maximum amount it can possibly be worth at that time is 100
B. It is better to exercise the put now than wait until expiration
C. You need to know the option premium to decide whether to exercise it now or to wait
D. If you exercise the option now, it is worth 95

Answer 1

D. If you exercise the option now, it is worth $95

Step-by-step explanation:

A put option gives the holder of the option the right to sell a certain stock at an specific strike price.

In order to determine the value of a put option, you must subtract the current market value from the strike value = strike value - current market value = $100 - $5 = $95

If the strike value is lower than the current market value, then the put option is worthless ($0).