Question

you purchased a put option on the share of alto industries. the strike price was $42.50 and the option premium was $1.30 per share. on the expiration date, the stock was valued at $41.40 a share. what is the payoff on the put option? (enter you answer in $ accurate to two decimal places. just enter a number with no $ symbol or other punctuation.)

Answer 1

Step-by-step explanation:

To calculate the payoff on a put option, we need to understand the basics of put options and how they work.

A put option gives the holder the right, but not the obligation, to sell a specified quantity of an underlying asset (in this case, shares of Alto Industries) at a predetermined price (strike price) on or before the expiration date.

In this scenario, you purchased a put option on shares of Alto Industries with a strike price of $42.50. The option premium you paid was $1.30 per share.

Now, let's calculate the payoff on the put option using the formula:

Payoff on Put Option = Maximum [0, (Strike Price - Stock Price at Expiration)]

In this case, the stock was valued at $41.40 per share on the expiration date.

Payoff on Put Option = Maximum [0, ($42.50 - $41.40)]

To calculate the maximum value, we compare the difference between the strike price and the stock price at expiration. If the difference is negative, we take the value as zero.

Payoff on Put Option = Maximum [0, $1.10]

Since $1.10 is positive, the maximum value is $1.10.

Therefore, the payoff on the put option is $1.10.