Question

1.You write a short put option giving the purchaser the right to sell 100 shares of Rothbard Corporation for a premium of $1,300. The strike price of the option is $20 and the final stock price is $85. What is your profit or loss?

2.You write a short call option giving the purchaser the right to buy 100 shares of Garrett Corporation for a premium of $1,600. The strike price of the option is $35 and the final stock price is $210. What is your profit or loss?

Answer 1

1: Put option is the right to sell an asset at a specified price. Hence the option will not be exercised since the market price is higher than the strike price.

Profit on the option = -Premium paid = -1300 which is a loss.

2: Call option is the right to buy a specified security at a pre-determined price.

Profit on the option = Shares*(Stock price - Strike price) - Premium

= 100*(210 -35) - 1600

=$15900