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Series 7 practice questionmediumOptions — Writing Puts

An investor writes 1 XYZ Mar 40 put at $3. At expiration, XYZ is at $35. What is the investor's gain or loss?

  1. AGain of $300
  2. BLoss of $200✓ Correct answer
  3. CLoss of $500
  4. DGain of $500
Explanation

Why B — Loss of $200

The put is exercised, so the writer must buy the stock at the $40 strike when it is worth $35, a $5 per share loss. However, the writer received $3 in premium, so the net loss is $5 - $3 = $2 per share, or $200 per contract. The breakeven for a put writer is the strike price minus the premium: $40 - $3 = $37.

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