The price of a stock on February 1 is $84 . A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10 . The options are exercised when the stock price is $85 . The trader's net profit or loss is
A. Loss of $1,000
B. Loss of $2,000
C. Gain of $200
D. Gain of $1000
A
The payoff is 90−85 or $5 per option. For 200 options the payoff is therefore 5×200 or $1000 . However the options cost 10×200 or $2000 . There is therefore a net loss of $1000 .
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