FRM Part I · FRM Exam Part I · Options Markets
A trader writes one European put option on a stock with a strike of USD 80, receiving a premium of USD 4.50. At expiration the stock price is USD 72. Ignoring discounting, what is the trader's net profit or loss per share?
The writer suffers a net loss of USD 3.50 per share. The put finishes USD 8 in the money (80 minus 72), which the writer must pay, partly offset by the USD 4.50 premium received, giving a net result of minus USD 3.50.
- ALoss of USD 3.50Correct
- BLoss of USD 8.00
- CProfit of USD 4.50
- DProfit of USD 3.50
Explanation
The put holder exercises and receives 80 - 72 = 8, so the writer pays 8. Net result is the premium received less the payout: 4.50 - 8.00 = -3.50. A loss of 8.00 ignores the premium received.
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