Bill Henricksen,purchased a put option on Cycle Inc.for $4.The put option has a strike price of $40 and currently Cycle Inc.shares trade for $44.The expiration date of the option is 6 months from today.What is Henricksen's maximum gain on his put option?

Question

Quizplus · Accepted Answer

Henricksen's maximum gain can be computed by subtracting the option premium from the strike price.$40 minus $4 would equal $36.If the stock of Cycle Inc.fell to $0 then the payoff from the put option would be $40.You would then subtract out the $4 he originally paid for the put option to get his maximum gain of $36.

Bill Henricksen,purchased a Put Option on Cycle Inc