Option payoffs: Haumer Hardware Co. stock is currently trading at $20. There are two types of options written on the stock. Call options with a strike price of $20, which expire next year, are currently trading at $8. Put options with a strike price of $20, which expire next year, are currently trading for $2. Steve invests $120 in common stock. Carol invests $120 in the call options. Paul invests $120 in the put options. At the end of one year the price of Haumer Hardware Co. stock is $18. Who made the most money off of their investment?

Question

Quizplus · Accepted Answer

At the end of one year, Steve's common stock is worth $108 ($120 initial investment - $12 loss due to the stock price decrease). 
Carol's call options expire worthless since the stock price is below the strike price. She loses her entire $120 investment. 
Paul's put options expire in-the-money with a payoff of $200 (($20 strike price - $18 stock price) x 100 shares x $2 premium). After subtracting his initial investment of $120, his total profit is $80. Therefore, Paul made the most money off of his investment.

Option Payoffs: Haumer Hardware Co