Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit per share if the option is exercised tomorrow? A)($16) B)($8) C)$8 D)$16

Question

Joe sold a put option on ZZZ Corp.with an exercise price of $40.The option expires tomorrow and ZZZ is currently trading at $28 per share.The option premium was $4 per share.What is Joe's profit <loss> per share if the option is exercised tomorrow?
A)($16)
B)($8)
C)$8
D)$16

Quizplus · Accepted Answer

If the put option is exercised tomorrow, Joe will be forced to buy ZZZ Corp. stock at the exercise price of $40 per share, even though the stock is only trading at $28 per share. Joe received a premium of $4 per share when he sold the option, which reduces his overall loss. 
Therefore, Joe's net loss per share is: 
Exercise price ($40) - Stock price ($28) + Premium received ($4) = $16 - $28 + $4 = ($8) per share. 
Therefore, the correct answer is B.

Joe Sold a Put Option on ZZZ Corp