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. What is Sarah's annualized gain/loss?
A) 60.60 percent gain
B) 6.06 percent loss
C) 60.60 percent loss
D) 6.06 percent gain
E) 0 percent

Question

Quizplus · Accepted Answer

To calculate the annualized gain/loss, we need to use the following formula: 
[(Exercise Price - Stock Price at Expiration) / Stock Price at Purchase] / (Time to Expiration/12)

Substituting the given values, we get: 
[(55 - 48) / 48] / (6/12) = 0.125 or 12.5%

Since Sarah paid a premium of $8.25 for the option, her net gain/loss would be (12.5% - 8.25%) = 4.25%.

Hence, the annualized gain/loss percentage would be 4.25% * 2 = 8.5%. Since this is a loss, the closest option is B - 6.06% loss.