Question

You purchase a put option on a stock. The profit at maturity of the option is ___________ where X equals the option's strike price, S_T is the stock price at contract expiration and CP₀ is the original purchase price of the option.

     A) Max(0, S_T - X) - CP₀

     B) Max(0, X - S_T ) - CP₀

     C) Max(0, X - S_T - CP₀)

     D) Max(0, S_T - X - CP₀)

The maximum loss a seller of a stock put option can possibly suffer is the _________.

     A)    put premium

     B)    stock price at maturity

     C)    stock price at maturity minus the put premium

     D)    strike price minus the put premium

Answer 1

So, the buyer of a put option can earn = ( Strike price - stock price) as the pay off from the option. Only if the strike price is greater than the stock price the buyer of the put option will exercise the option.

The buyer of a put option pays a premium to buy the put option.

So, the profit at maturity is : (Strike price - stock price )- put premium

= Max (0, X - ST ) - CPO

So, the correct option is option B.

The maximum loss that a seller of a put option suffer is :

In case the stock price falls to zero, the seller loses the strike price and he received the premium on the put option ,so the loss is reduced by the amount of premium . The net loss is strike price minus the put premium.

So, the correct option is option D.