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15 December, 19:44

The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit or loss is A. Gain of $1,000 B. Loss of $2,000 C. Loss of $2,800 D. Loss of $1,000

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  1. 15 December, 19:46
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    D. Loss of $1000

    Explanation:

    Given that

    A trader sells 200 put options at strike price of $120

    And options are exercised when stock price is $110

    Thus, payoff that must be made on option

    = 200 * (120 - 110)

    = 200 * 10

    = $2000.

    Also,

    Amount received for the option

    = price of option * quantity

    = 5 * 200

    = $1000

    Therefore,

    Trader's net loss = 2000 - 1000

    = $1000
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