An investor has purchased 7 stock put options at a price of $2.32 with a strike price of $65. If the stock price at expiration is $59.20, what is the payoff of the position?

Question

Quizplus · Accepted Answer

To calculate the payoff of the position, we need to determine whether the put option is in or out of the money. In this case, the stock price ($59.20) is below the strike price ($65), so the put option is in the money.

The investor can exercise each of the 7 put options, selling 700 shares of the stock at the strike price of $65. However, since the current market price is lower ($59.20), the investor can buy the shares at the lower price and then sell them at the higher strike price.

Therefore, the profit per share is $65 - $59.20 = $5.80. The investor earns this profit on each of the 7 put options, so the total profit is:

Profit per option = $5.80 x 100 (since each option represents 100 shares) = $580
Total profit = $580 x 7 (since the investor has 7 put options) = $4,060

Therefore, the answer is C, $4,060.

An Investor Has Purchased 7 Stock Put Options at a Price