USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Sarah Kling bought a six-month Peppy Cola put option with an exercise price of $55 for a premium of $8.25 when Peppy was selling for $48.00 per share.
-Refer to Exhibit 14.3. If at expiration Peppy is selling for $42.00, what is Sarah's dollar gain or loss?
A) $420 gain
B) $420 loss
C) $475 loss
D) $475 gain
E) $525 gain

Question

Quizplus · Accepted Answer

Sarah's gain can be calculated by first determining the intrinsic value of the put option at expiration, which is the exercise price minus the stock price at expiration ($55 - $42 = $13). Since she bought the option for $8.25, her net gain per share is $13 - $8.25 = $4.75. Since options typically represent 100 shares, her total gain is $4.75 * 100 = $475.