Which one of the following statements concerning option payoffs is correct?
A) The buyer of a call profits when the exercise price exceeds the market price.
B) The buyer of a call profits when the strike price exceeds the exercise price.
C) A put will only be exercised if both the seller and the buyer can profit.
D) Both the buyer and the seller profit when a call is exercised.
E) The seller of a put incurs a loss when a put is exercised.

Question

Quizplus · Accepted Answer

The seller of a put option incurs a loss when the put is exercised because they are obligated to buy the underlying asset at the strike price, which is higher than the current market price. This results in a loss if the market price is below the strike price at the time of exercise.

Which One of the Following Statements Concerning Option Payoffs Is