Long Puts P/L Flashcards
Long K=$73 Put
S=$78 and Premium=$4
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = -$4.
Full Explanation:
This Long Put allows you to sell shares of stock worth S=$78 for K=$73.
There is no way to make money by selling something worth S=$78 for only K=$73. Because you can’t exercise the option to make money, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).
If you had shares you wanted to sell, you could easily sell them on the open market for $78. Exercising the option would mean being underpaid by $5, which we would think of as a $5 loss.
Clearly, you won’t exercise the option, so it will just expire unexercised.
The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!
Long K=$59 Put
S=$53 and Premium=$1
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = $5.
Full Explanation:
This Long Put allows you to sell shares of stock worth S=$53 for K=$59. $59 is a great price for something only worth $53. It’s a $6 premium.
A mnemonic is that you can “Put” the shares out on the market and someone else (your counterparty) will have to buy them for K=$59.
If you have shares you want to sell, you can exercise the option to sell them for $6 extra. If you don’t have shares you want to sell, you could easily borrow money and buy the shares for $53 on the open market. You then exercise your option to sell the same shares for $59, pocketing a $6 profit.
Either way, the option “In The Money (ITM)”. You will exercise it to gain the option’s intrinsic value of $6.
In addition to the $6 gain, you also paid a premium of $1. Therefore, your final P/L combines the $6 gain and the $1 loss: P/L = $6 - $1 = $5 (per share).
Long K=$58 Put
S=$63 and Premium=$4
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = -$4.
Full Explanation:
This Long Put allows you to sell shares of stock worth S=$63 for K=$58.
There is no way to make money by selling something worth S=$63 for only K=$58. Because you can’t exercise the option to make money, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).
If you had shares you wanted to sell, you could easily sell them on the open market for $63. Exercising the option would mean being underpaid by $5, which we would think of as a $5 loss.
Clearly, you won’t exercise the option, so it will just expire unexercised.
The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!
Long K=$45 Put
S=$37 and Premium=$2
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = $6.
Full Explanation:
This Long Put allows you to sell shares of stock worth S=$37 for K=$45. $45 is a great price for something only worth $37. It’s a $8 premium.
A mnemonic is that you can “Put” the shares out on the market and someone else (your counterparty) will have to buy them for K=$45.
If you have shares you want to sell, you can exercise the option to sell them for $8 extra. If you don’t have shares you want to sell, you could easily borrow money and buy the shares for $37 on the open market. You then exercise your option to sell the same shares for $45, pocketing a $8 profit.
Either way, the option “In The Money (ITM)”. You will exercise it to gain the option’s intrinsic value of $8.
In addition to the $8 gain, you also paid a premium of $2. Therefore, your final P/L combines the $8 gain and the $2 loss: P/L = $8 - $2 = $6 (per share).
