NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A client has purchased a 6-month European put option on ABC stock with a strike price of $50 for a premium of $3 per share. At expiration, ABC stock is trading at $45 per share. What is the client's per-share profit or loss?
- A$5 profit
- B$5 loss
- C$2 profit
- D$3 loss
Show answer & explanationAnswer & explanation
Correct answer: C. $2 profit
The client bought a put option, giving them the right to sell ABC stock at $50. Since the market price at expiration is $45, they can exercise the option, selling at $50 shares worth $45 in the market. The intrinsic value is $50 - $45 = $5. Subtracting the premium paid of $3, the per-share profit is $5 - $3 = $2.
Why the other options are wrong
- A. This is the intrinsic value, without accounting for the premium.
- B. This would be the loss if the option was exercised and the premium was $10, or if it was a call option that expired worthless with a $5 premium.
- D. This would be the loss if the option expired worthless (market price above strike).
Long Put Option Profit/Loss
The financial outcome for an investor who buys a put option, calculated by comparing the option's intrinsic value at expiration to the premium paid.
- Right to sell stock at strike price
- Profitable if market price < strike price
- Max loss = premium paid (if market price >= strike price)
- Break-even = Strike Price - Premium
Memory trick: Long put: 'P' for 'Protection' if price 'Plummets'.