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

To calculate the net profit or loss, we need to use the following formula: 
Net profit/loss = (option premium x number of contracts) - (exercise price x number of contracts) +/- (stock price - exercise price) x (number of contracts)
Given: 
Option premium = $0.90 
Number of contracts = 20 
Exercise price = $27.50 
Stock price = $22.40

Substituting the given values: 
Net profit/loss = ($0.90 x 20) - ($27.50 x 20) + ($22.40 - $27.50) x 20 
Net profit/loss = $18 - $550 + (-$5.10) x 20 
Net profit/loss = -$8,400

Therefore, the net loss on this investment is $8,400. Hence, the correct answer is B.

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