Question

A customer buys 100 DEF at 70, but several months later, the stock is trading at 82.85. The customer, concerned about a possible pullback, buys 1 DEF Aug 80 put at 1.50. If the stock subsequently falls to 77.25 and the customer sells his stock by exercising the put, the result is:

Answer 1

Answer:

Gain of $850

Explanation:

Purchase Costs:

1. 100 shares at $70 = $7,000
2. Put Option (100 x $1.5) = $150

Total costs: $7,150

Selling benefits (option exercise)

1. 100 shares at $80 = $8,000

Result: $8,000 - $7,150 = $850

The put option is exercised because the price is below the option price.