You purchased four put option contracts with a strike price of $34.5 and a premium of $.85. What is the total net amount you will receive for your shares if you exercise this contract when the underlying stock is selling for $31.50 a share?
A)$13,460
B)$13,700
C)$15,740
D)$16,340
E)$16,400

Question

Quizplus · Accepted Answer

The total net amount received is calculated by first determining the gain per share, which is the difference between the strike price ($34.5) and the stock price ($31.50), giving us $3.00 per share. However, we must also subtract the premium paid per share ($.85), resulting in a net gain of $2.15 per share. Since each contract represents 100 shares, and there are four contracts, the total shares involved are 400. Multiplying the net gain per share by the total number of shares (400) gives us $860. The initial question seems to ask for the total amount received for the shares, which would be the exercise value plus the net gain from the options. The exercise value is 400 shares times the stock price ($31.50), which equals $12,600. Adding the net gain from the options ($860) to this amount gives us $13,460. However, the correct interpretation based on the standard options trading context is to calculate the net amount received from exercising the option itself, which is the net gain of $2.15 per share times 400 shares, totaling $860. The confusion arises from the phrasing of the question, which could imply adding the intrinsic value of the exercise to the net gain, but in the context of options trading, the focus is typically on the gain or loss from the option transaction itself.

You Purchased Four Put Option Contracts with a Strike Price