If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?
A) There would be a profit of $800.
B) There would be a profit of $400.
C) There would be a loss of $400.
D) There would be a loss of $800.

Question

Quizplus · Accepted Answer

The investor has the right to sell 100 shares of the underlying stock at the exercise price of $40 per share, even though the current market price is only $32 per share. This means they can sell their 100 shares for a total of $4,000 (100 shares x $40 per share).

However, the investor paid $400 for the put option, so their net profit would be $3,600 ($4,000 - $400). This represents a profit of $400.

If an Investor Buys a 100-Share Put Option for $400