Assume a three- month put option on a BHP share has strike price of $14 and premium of 25 cents. Then the payoff to the holder at a spot price of $21 is minus 25 cents.

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Quizplus · Accepted Answer

The payoff for a put option is max(0, strike price - spot price). Since the spot price ($21) is higher than the strike price ($14), the payoff is $0, not minus 25 cents. The premium is a sunk cost and does not affect the payoff calculation.

Assume a Three- Month Put Option on a BHP Share