Series 7 Exam Question 190: Answer and Explanation

Question: 190

An investor with no other position in XYZ writes 1 XYZ Aug 30 put at 2.75. If the put option is exercised when XYZ is trading at 27.50 and the investor immediately sells the stock in the market, what is their gain or loss?

• A. $25 gain
• B. $25 loss
• C. $250 gain
• D. $250 loss

Correct Answer: A

Explanation:

A. The easiest way for you to see what's going on is to set up an options chart. This investor wrote (sold) the XYZ put for a premium of 2.75, so you have to put $275 (2.75 × 100 shares per option) in the "Money In" side of the chart because the investor received the money for selling the option. Next, the option was exercised, so you have to put $3,000 (the 30 strike price × 100 shares per option) in the "Money Out" side of the chart because "puts switch," meaning that the exercised option has to go on the opposite side of the chart from the premium. After that, the investor sold the 100 shares of stock in the market for $27.50 per share for a total of $2,750, which goes in the "Money In" side of the chart because the investor received money for selling the stock. Total up the two sides and you see that the investor received $3,025 and spent $3,000 for a whopping profit of $25.