You sold five put option contracts on QLN stock with an exercise price of $45 and an option price of $2.20. Today, the option expires and the underlying stock is selling for $38.65 a share. Ignoring trading costs and taxes, what is the total profit or loss on this investment?
A) -$2,075
B) -$415
C) $855
D) $1,100
E) $4,275

Question

Quizplus · Accepted Answer

The total profit or loss can be calculated by considering both the premium received from selling the put options and the loss from the exercise of the options. Since the stock price at expiration ($38.65) is below the exercise price ($45), the options will be exercised. For each contract, the loss is the difference between the exercise price and the stock price, multiplied by the number of shares per contract (usually 100 shares per contract). The total loss from the exercise is (45 - 38.65) * 100 * 5 = $3,175. However, you initially received a premium of $2.20 per share, or $2.20 * 100 * 5 = $1,100. The net loss is $3,175 - $1,100 = $2,075.

You Sold Five Put Option Contracts on QLN Stock with an Exercise