Tim purchased 5 put option contracts on Western Fields stock. The strike price was $35 and the option premium was $.55. At expiration, the stock was selling for $35.75. What is the payoff on the option contracts?
A)−$60
B)−$30
C)$0
D)$30
E)$60

Question

Quizplus · Accepted Answer

Since Tim has put option contracts, he has the right to sell the stock at the strike price of $35. However, since the stock is selling for $35.75 at expiration, he would not exercise his option and would let it expire worthless. Therefore, his payoff would be simply the premium he paid for the options: 5 contracts * $.55 premium per contract = $2.75. Since he paid this amount and did not receive any payout, his net payoff is $0.

Tim Purchased 5 Put Option Contracts on Western Fields Stock