Asked by Jalen Taylor on Jun 30, 2024
Verified
You sold a put contract on EDF stock at an option price of $.40. The option had an exercise price of $20. The option was exercised. Today, EDF stock is selling for $19 a share. What is your total profit or loss on all of your transactions related to EDF stock assuming that you close out your positions in this stock today? Ignore transaction costs and taxes.
A) -$140
B) -$60
C) $40
D) $60
E) $140
Put Contract
A financial contract granting the owner the privilege to sell a certain asset at a predetermined price during a set period.
Option Price
The amount paid for the option itself, representing the price to buy (call) or sell (put) an underlying asset by a specific date at a specified price.
Exercise Price
The cost at which an option's possessor has the right to acquire (if it's a call option) or divest (if it's a put option) the asset underlying the option.
- Determine profit or loss from trading options including put and call contracts.
Verified Answer
AM
Axowell musicJul 05, 2024
Final Answer :
B
Explanation :
When the put option was exercised, you were forced to buy the stock for the exercise price of $20 per share. Since the stock is currently selling for $19 per share, you have a loss of $1 per share. However, you received $0.40 per share for selling the put option, which helps offset your loss. Therefore, your net loss per share is $0.60. Since one contract typically covers 100 shares, your total loss is $60.
Learning Objectives
- Determine profit or loss from trading options including put and call contracts.