FRM Part I · FRM Exam Part I · Properties of Options
An investor buys a European put option on a stock with a strike price of $50 and pays a premium of $3.20. At expiration the stock trades at $44. What is the investor's net profit per share, ignoring discounting and transaction costs?
The net profit is $2.80 per share. The put pays $50 minus $44, or $6.00, at expiration, and the investor paid $3.20 to buy it, so profit is $6.00 minus $3.20. Quoting $6.00 would ignore the premium paid.
- A$2.80Correct
- B$6.00
- C$3.20
- D$9.20
Explanation
The put payoff at expiration is max(50 - 44, 0) = $6.00. Subtracting the $3.20 premium gives a net profit of $2.80. The $6.00 option ignores the premium paid, which is a gross payoff rather than profit.
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