The premium on a put option on the market index with an exercise price of 1050 is $9.30 when originally purchased. At expiration of 2 months the position is closed, and the index spot price is 1072. What is the Put Payoff?

Question

Easton Combs

Business

28 August, 12:06

The premium on a put option on the market index with an exercise price of 1050 is $9.30 when originally purchased. At expiration of 2 months the position is closed, and the index spot price is 1072. What is the Put Payoff?

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Answers (1)

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Marco Cobb · Answer 1

The put payoff = $1,072 - $1,050 = $22 per share

Explanation:

The put payoff is simply the difference between the spot price and the exercise price.

To determine the real profit obtained in this transaction we would need to know the investor's return rate. One of the basic pillars in finance it that $1 today is worth more than $1 tomorrow. We need a return rate to adjust the premium paid, for example if the return rate = 6%, then the premium would have been $9.30 x (1 + 6%/12) ² = $9.30 x 1.005² = $9.39

profit = number of shares x (put payoff - adjusted premium)