Option payoffs: What is the payoff for a put option with a strike price of $20 if the price of the underlying stock at expiration is $18?

Question

Quizplus · Accepted Answer

The payoff for a put option is maximum when the strike price is higher than the stock price. In this scenario, the strike price is $20 and the stock price is $18, which means the option is in-the-money. The payoff is computed by subtracting the stock price from the strike price ($20 - $18 = $2) and since it is a put option, the investor has the right to sell the stock at the strike price of $20. Therefore, the investor's profit is the payoff of $2. Option A is incorrect because the investor has the right to sell the stock for $20, not for $18 which is the market price. Option C and D are incorrect because the investor would not want to exercise the option and sell for $20 when the market price is lower at $18.

Option Payoffs: What Is the Payoff for a Put Option