You bought four put options (each on 100 shares) on EZ stock with an exercise price of $35 per share and an option price of $1.35 per share.

You bought four put options (each on 100 shares) on EZ stock with an exercise price of $35 per share and an option price of $1.35 per share. Today, the contracts expire and the stock is selling for $36.25 a share. What is your net profit or loss on this investment? Ignore commissions and taxes. Round the answer to the nearest dollar. Enter as positive if a profit; enter as negative if a loss.

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  1. Answer:

    -$ 540

    Explanation:

    Put Option – provides right to sell share at exercise price on expiry.

    As it is an Right not Obligation, Thus, buyer will exercise the right only if he is gaining at expiry and he will gain only if exercise price is higher than spot price at expiry

    In this case Exercise Price ($ 35) is lower than the spot price ( $ 36.25) at expiry. Thus he will not execrise the option.

    He will lose all what he spend in buying option that is $ 1.35 per share

    Thus,

    Net profit or loss on this investment = 4 Options * 100 Shares each * Loss of $ 1.35 per Share

    Net profit or loss on this investment = 4 * 100 * (-1.35)

    Net profit or loss on this investment = -$ 540

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