Homework Help is Here – Start Your Trial Now!
Business
Finance
You write a put option contract at a strike price of $1.25/option; you are short in options expire in 3 months at a strike price of $30/security. What is your net gain or loss if at- expiration, the underlying security is trading at $27.25/security?

You write a put option contract at a strike price of $1.25/option; you are short in options expire in 3 months at a strike price of $30/security. What is your net gain or loss if at- expiration, the underlying security is trading at $27.25/security?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
See similar textbooks
icon
Related questions
Question

11

**Scenario: Options Trading** You write a put option contract at a premium of $1.25 per option, meaning you are short in the put. The options expire in 3 months with a strike price of $30 per security. At expiration, the underlying security is trading at $27.25 per security. **Question:** What is your net gain or loss in this scenario? --- ### Explanation: 1. **Initial Setup:** - **Option Premium (Income):** $1.25 - **Strike Price:** $30.00 - **Market Price at Expiration:** $27.25 2. **Calculation of Outcome:** - **Intrinsic Value of the Put:** (Strike Price - Market Price) = $30.00 - $27.25 = $2.75 - Since the market price is less than the strike price, the option will be exercised. 3. **Net Gain/Loss Calculation:** - **Loss from Option Exercise:** Intrinsic Value - Option Premium = $2.75 - $1.25 = $1.50 loss per option Therefore, your net loss is $1.50 per option.
Transcribed Image Text:**Scenario: Options Trading** You write a put option contract at a premium of $1.25 per option, meaning you are short in the put. The options expire in 3 months with a strike price of $30 per security. At expiration, the underlying security is trading at $27.25 per security. **Question:** What is your net gain or loss in this scenario? --- ### Explanation: 1. **Initial Setup:** - **Option Premium (Income):** $1.25 - **Strike Price:** $30.00 - **Market Price at Expiration:** $27.25 2. **Calculation of Outcome:** - **Intrinsic Value of the Put:** (Strike Price - Market Price) = $30.00 - $27.25 = $2.75 - Since the market price is less than the strike price, the option will be exercised. 3. **Net Gain/Loss Calculation:** - **Loss from Option Exercise:** Intrinsic Value - Option Premium = $2.75 - $1.25 = $1.50 loss per option Therefore, your net loss is $1.50 per option.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS