FRM Part I · FRM Exam Part I · Options Markets
A trader writes one European put option on 1,000 shares with a strike of $40 and receives a premium of $2.50 per share. At expiry the share price is $34. Ignoring discounting and costs, what is the trader's net profit or loss?
The writer loses $3,500. The put finishes $6 in the money (40 minus 34), costing $6,000 on 1,000 shares, partly offset by $2,500 of premium received. Net loss is $3,500. Ignoring the premium would overstate the loss at $6,000.
- ALoss of $3,500Correct
- BLoss of $6,000
- CLoss of $8,500
- DProfit of $2,500
Explanation
The put holder exercises, so the writer pays max(40-34,0) = $6 per share. Net per share = 2.50 - 6 = -$3.50. Over 1,000 shares the loss is $3,500. A $6,000 loss omits the premium received; $8,500 adds the premium to the loss, which is the wrong sign.
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