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 $47.00, what is Sarah's dollar gain or loss?
A) $25 loss
B) $250 loss
C) $25 gain
D) $250 gain
E) $0

Question

Quizplus · Accepted Answer

Sarah's loss is the difference between the premium paid and the difference between the exercise price and the stock price at expiration. The premium paid is $8.25. The difference between the exercise price and the stock price at expiration is $55 - $47 = $8. Therefore, Sarah's loss is $8.25 - $8 = $0.25.