FRM Part I · FRM Exam Part I · Properties of Options
A trader writes one European put option with a strike price of $40 and receives a premium of $2.50. At expiry the underlying trades at $34. What is the trader's profit or loss per share, ignoring discounting?
The writer loses $3.50 per share. The put is exercised against the writer for a $6 payout (40 minus 34), and the $2.50 premium received reduces that loss to $3.50.
- ALoss of $8.50
- BLoss of $6.00
- CLoss of $3.50Correct
- DProfit of $2.50
Explanation
The put finishes in the money with intrinsic value 40 - 34 = $6, so the writer pays out $6. Offsetting the $2.50 premium received gives a net loss of $3.50. A loss of $6.00 ignores the premium, and $8.50 subtracts the premium instead of adding it.
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