Explanation:
Franky M., as the buyer of the put option, holds the long position. This means he has the right, but not the obligation, to sell the underlying asset (in this case, the stocks of Fast Cars Co.) at the strike price. Lee V., as the seller (writer) of the put option, holds the short position and has the obligation to buy at the strike price if Franky exercises.
Calculations:
$3.30 × 2,000 shares = $6,600$31.70 − $30.00 = $1.70 per share$1.70 × 2,000 shares = $3,400$3,400 − $6,600 = −$3,200 (loss)$6,600 − $3,400 = +$3,200 (gain)Therefore, Franky lost $3,200 on the long position while Lee gained $3,200 on the short position.
Q.728 Franky M. purchased an American put option from Lee V. on the stocks of Fast Cars Co. to sell 2,000 shares of stock at a price of $3.30 per share. The put option has a strike price of $31.70. If the stock price at the expiration of the option is $30, then which of the following statements is true?
A
Franky lost $6,600 on the short position while Lee gained $6,600 on the long position.
B
Franky lost $6,600 on the long position while Lee gained $6,600 on the short position.
C
Franky lost $3,200 on the long position while Lee gained $3,200 on the short position.
D
Franky lost $3,200 on the short position while Lee gained $3,200 on the long position.
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