You sold two $42.50 put contracts on CTB stock at an option price per share of $1.90. The options were exercised today when the market price was $38.60 a share. What is your net profit on this investment? Ignore transaction costs and taxes.

Question

Quizplus · Accepted Answer

The break-even point for this put option contract is calculated by subtracting the premium received from the strike price. In this case, the break-even point is $40.60 ($42.50 - $1.90). Since the options were exercised at a market price of $38.60, you would have to buy 200 shares at $42.50 each, for a total cost of $8,500 ($42.50 x 200). However, since the options were exercised and you sold the shares for $38.60 each, you received $7,720 ($38.60 x 200). 
Therefore, your net loss would be $780 ($8,500 - $7,720). However, since you received a premium of $380 ($1.90 x 200) upfront for selling the options, your net profit is -$400 ($380 - $780).

You Sold Two $42