3) You have the potential opti
3) You have the potential option to write a put contract with astrike price of $35.00 with a expiration day that is in 6 months.This particular contract is for 100 SH’s for the put option. Youreceive $2.75 per share for writing the put contract.
A) What is the maximum gain/profits($) from potentially writingthe put option contract?
B) What is your maximum loss potential loss ($) resulting fromwriting this contract?
Answer:
A put option is an option to sell the underlying asset at thestrike price on maturity. When you write or sell a put option, youare selling someone else the option the sell the underlying assetto you at the strike price on maturity. Lets say you sell the putoption to “A”. Now, A has the option to sell the 100 shares to you@$35 on maturity date. When you sell the option you receive theoption premium of $2.75 per share.
A) In the above example, A will sell thisoption to you only in case the actual stock price is less than thestrike price, so that A buys the 100 shares from the market atlower than strike price and sells to you @$35. Now, you receive 100shares from A and then sell it on the market at a lower price. So,you will have a loss in any case if A decides to exercise theoption. Therefore, Maximum gain will occur only if A does notexercise the option and the gain in that case would be the premiumreceived.
Maximum Gain = Option premium = $2.75 x 100 =$275
B) Maximum potential loss would be when theactual market price of the shares is $0. In that case you purchasefrom A @$35 but [email protected]$35 minus premium received on sellingthe option to A.
Maximum Loss = ($35 x 100) – $275 = $3225
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