You sold twenty put contracts on Twin City stock at an option premium of $.90. The options have an exercise price of $27.50. The options were exercised today when the stock price was $22.40 a share. What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $22.40? Ignore transaction costs and taxes.
A) -$12,000
B) -$8,400
C) $1,800
D) $8,400
E) $12,000

Question

Quizplus · Accepted Answer

The net loss is calculated by considering the premium received and the loss from the exercise. You received $1,800 from selling the options (20 contracts * 100 shares/contract * $0.90). When the options were exercised, you had to buy the stock at $27.50 and sell it at $22.40, resulting in a loss of $5.10 per share. The total loss is $10,200 (20 contracts * 100 shares/contract * $5.10). The net loss is $10,200 - $1,800 = $8,400.

You Sold Twenty Put Contracts on Twin City Stock at an Option