You are fortunate enough to own a put option with a strike price of $40 on the stock of Osmerc, Inc. The current stock price is $3. When the option expires, you expect the stock price to be either $2 or $5. Assume the risk-free rate of interest is zero. What is the value of your option?

Question

Quizplus · Accepted Answer

The value of a put option is the strike price minus the stock price at expiration, if the stock price is below the strike price. If the stock price is $2, the option is worth $40 - $2 = $38. If the stock price is $5, the option is worth $40 - $5 = $35. Since the stock price can be either $2 or $5, the maximum value of the option is $38, but the expected value is $37 if both outcomes are equally likely.

You Are Fortunate Enough to Own a Put Option with a Strike