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Use the following information for questions 9 and 10 below. You may assume (for simplicity) that...

Use the following information for questions 9 and 10 below. You may assume (for simplicity) that both put and call option contracts for gold are for a quantity of one ounce of gold. Both the put and call options have the same maturity. The premium for the call is $2/ounce and the premium for the put is $1/ounce. Both options have a strike price of $1100/ounce. An investor writes (or sells) one put option contract. If the price of gold in the spot market at the maturity date of the option is $1095, what is her profit/loss?

A profit of $5.

A profit of $6.

A loss of $5.

A loss of $4.

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Answer #1

Put option seller receives the put option premium and will have to buy the security at the specified price at the option of the put option buyer

The buyer will exercise the option since the price in the market is lower than the strike price

hence, Total profit/loss for the put option seller = (1,095-1,100)+ 1

= -$4

i.e. a loss of $4

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