Steve sold a put option when the option premium was $1.20. What is Steve’s total profit if the exercise price was $15 and the option was never exercised?
To determine: The total profit of the put option.
Introduction:
The right that an individual has to sell the asset at the price that is fixed during a specific period is a put option.
Explanation of Solution
Given information:
Person S sold a put option when the premium of the option was $1.20. The exercise price was $15 and the option was never exercised.
Explanation:
The profit for Person S in the above situation is $1.20. Person S does not exercise his put option and so he can obtain only the premium back as a profit. The put option’s potential profit is limited, however, the price of the stock cannot fall below the value zero.
The put option seller will generally have a limited profit and the loss for the put option seller is unlimited. In the above situation, the seller of the put option will get only the premium amount as a profit.
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Fundamentals of Corporate Finance
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