Question #63940

suppose that a European put option to with a strike price of $70 costs $5 and is held until maturity.

a) Under what circumstances will the put option be exercised?

b) Under what circumstances the seller of the out option make a profit?

a) Under what circumstances will the put option be exercised?

b) Under what circumstances the seller of the out option make a profit?

Expert's answer

A) The option will be exercised if the stock price at maturity is less than $70.00. Note that if the stock price is between $65.00 and $70.00 the seller of the option makes a profit even though the option is exercised.

B) Ignoring the time value of money, the seller of the option will make a profit if the stock price at maturity is greater than $65.00. This is because the cost to the seller of the option is in these circumstances less than the price received for the option.

B) Ignoring the time value of money, the seller of the option will make a profit if the stock price at maturity is greater than $65.00. This is because the cost to the seller of the option is in these circumstances less than the price received for the option.

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