Three months back you bought for $4 a put option on a stock with an exercise price of $100.If the stock price at expiration of this option is $92, what is your return on investment?
A)200 percent
B)150 percent
C)100 percent
D)50 percent Proceeds = Stock price - Exercise price
100 - 92 = $8
Profits = proceeds - original investment
= 8 - 4 = $4

Question

Quizplus · Accepted Answer

The initial investment was $4 to buy the put option. At expiration, the stock price is $92 which is below the exercise price of $100. Therefore, the put option is in-the-money and the holder can sell the stock at the exercise price of $100.

The option holder receives $100 for each share sold and incurs a cost of $92 to purchase the stock in the market. Therefore, the profit per share is $8.

Since one put option typically represents 100 shares, the profit is $8 x 100 = $800.

The return on investment is calculated by dividing the profit by the initial investment and multiplying by 100%.

Return on Investment = (Profit/Initial Investment) x 100%
                   = ($800/$4) x 100%
                   = 20,000%

Therefore, the return on investment is 100%. Option C) is the correct choice.

Three Months Back You Bought for $4 a Put Option