A particular put is the option to sell stock at $40. It expires after three mont

Question

A particular put is the option to sell stock at $40. It expires after three months and currently sells for $2 when the price of the stock is $42.

a) If an investor buys the put, what will the profit be after three months if the price of the stock is $45? $40? $35?
b) What will the profit from selling this put be after three months if the price of the stock is $45? $40? $35?
c) Compare the answers to a) and b). What is the implication of the comparison?

The answer for a) is ($2), ($2), and $3

The answer for b) is $2, $2, and ($3)

Do not copy and paste other chegg answer, it is incorrect!

Explanation / Answer

We have Strike price of Put =40

Pric eof Put = $2

Stock price = $42

(a) If STock price is 45.

Then Intrinsic value = Strike price-Stock price = 40-45 = -5 = 0

SO as diff is negative, it is a zero value option & hence will not be excrised.

So Loss = Intrinsic value - option price = 0-2 = -2

If STock price is 40.

Then Intrinsic value = Strike price-Stock price = 40-40 = 0

Again there is no loss or gain here.

So Loss = Intrinsic value - option price = 0-2 = -2

If STock price is 35.

Then Intrinsic value = Strike price-Stock price = 40-35 = 5

SO as diff is positive, hence will be excrised.

So Profit = Intrinsic value - option price = 5-2 = 3

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