Explanation

For a put option seller (writer), the profit calculation is:

Profit for put seller = Premium received - Max(0, Exercise price - Underlying price at expiration)

Given:

• Put option premium = $1.00 (received by seller)
• Exercise price = $40.00
• Underlying price at expiration = $35.00

Step 1: Calculate the payoff for put option buyer Put option payoff for buyer = Max(0, Exercise price - Underlying price) = Max(0, $40.00 - $35.00) = Max(0, $5.00) = $5.00

Step 2: Calculate profit for put seller Since the put seller receives the premium but must pay the buyer's payoff: Profit for put seller = Premium received - Buyer's payoff = $1.00 - $5.00 = -$4.00

Wait, let me double-check this calculation.

Actually, the profit for put seller is: Profit = Premium received - Max(0, Exercise price - Underlying price) = $1.00 - Max(0, $40.00 - $35.00) = $1.00 - $5.00 = -$4.00

This would suggest option B (-$4.00) is correct.

However, let me reconsider: The question asks for "profit for a put seller" and the options are: A. -$5.00 B. -$4.00 C. $4.00

My calculation shows -$4.00, which matches option B.

But wait, I need to check if there's any nuance: The put seller receives $1.00 premium upfront. At expiration, if the underlying is at $35.00 and exercise price is $40.00, the put buyer will exercise, and the put seller must buy the underlying at $40.00 when it's worth only $35.00, incurring a $5.00 loss on the transaction. However, the seller already received $1.00 premium, so net loss is $4.00.

Therefore, the correct answer is B. -$4.00.

Key Concept:

• Put seller profits when the underlying price is at or above the exercise price (put expires worthless)
• Put seller loses when the underlying price is below the exercise price
• The loss is offset by the premium received