CFA Level IDerivativesEasy
An investor buys a European put option on a stock for a premium of $3.50. The put has a strike price of $60. At expiration, the stock is trading at $54. What is the investor's profit per share?
- A$6.00
- B$2.50
- C$3.50
- D$8.50
Show answer & explanationAnswer & explanation
Correct answer: B. $2.50
The put payoff at expiration is max(Strike − Stock price, 0) = max(60 − 54, 0) = $6.00. Profit equals payoff minus the premium paid: $6.00 − $3.50 = $2.50 per share.
Why the other options are wrong
- A. This is the payoff only, ignoring the premium cost.
- C. This is the premium paid, not the net profit.
- D. This incorrectly adds the premium to the payoff instead of subtracting it.
Put Option Profit
The profit to a put buyer equals the option's payoff at expiration minus the premium paid.
- Put payoff = max(Strike − Spot, 0)
- Profit = Payoff − Premium paid
- Maximum loss to a put buyer is limited to the premium paid
Memory trick: Puts pay when prices plummet — profit is payoff minus premium.