Question

11- Today, I bought I put contract on GM with one-year to maturity with an exercise price of $60 at a premium of $7 when GM stock price was $55. Three month later, GM stock price closed at $52 while the option premium was $12 at which time I closed my position by exercising my put option. Compute my gain/loss.

Answer 1

As the put option was exercised , the stock was sold at $60 whereas the market price was $52

So, the payoff from exercising = $60-$52 = $8

Cost of put option =$7

So,Gain = $8-$7 =$1

(As the put option gives more value by selling, exercising the option is not advisable even though it may be possible as in case of American option, So the right action is to sell the option and get $12 and the net gain will be $12-$7 = $5)