A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29, and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?

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Quizplus · Accepted Answer

Firstly, it is important to note that a put option gives the owner the right, but not the obligation, to sell the underlying asset (in this case, the stock) at the exercise price of $30. 
Since the stock price rose to $32, the speculator would not exercise the option, as they would not want to sell the stock for $30 when they could sell it for a higher price on the open market. 
Therefore, the maximum profit per unit for the speculator is the premium they paid for the put option, which is $4. 
However, since the speculator did not exercise the option, they would only realize this profit if they decided to sell the option itself before it expired. 
The difference between the premium paid and the profit realized is $1, so the correct answer is B) $3.

A Speculator Purchases a Put Option for a Premium of $4