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10 February, 23:10

The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or loss is:

A. Loss of $1,000

B. Loss of $2,000

C. Gain of $200

D. Gain of $1000

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Answers (1)
  1. 10 February, 23:16
    0
    The net loss of the trader amounts to $1,000, which means the correct option is A

    Explanation:

    The payoff is computed as:

    Payoff = Strike price - Option's Stock price

    where

    Strike price is $90

    Option's Stock Price is $85

    Putting the values above:

    Payoff = $90 - $85

    = $5 per option

    The trader bought 200 options, so the payoff would be:

    Payoff = Options * Price per option

    = 200 * $5

    = $1,000

    And the option cost would be:

    Option cost = Options * Option Price

    = 200 * $10

    = $2,000

    So, there computing net loss or gain as:

    Net loss or gain = Payoff - Option cost

    = $1,000 - $2,000

    = $1,000 (net loss)

    Therefore, the correct option is A
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