Explanation:
At initiation, the trader gets $5 \times 7.6 \times 100 = ` from the sale of the put options. This is because for stock options, the premium is quoted as a dollar amount per share, and most contracts represent the commitment of 100 shares.
At maturity, the trader made a loss of (\`9.3 - \13.5`) \times 500 = \`2,100$ Therefore, the net cash flow for the trader is $+\ ($3,800 - 2,100$).
Note: On the derivatives market, options are quoted in per-share prices but only sold in 100 share lots. In other words, each put has 100 shares. In this case, for example, the put option is quoted at $7.6, but the buyer pays $7.6 \times 100 = ` per put option. For 5 puts, that's $760 \times 5 = `
Q.597 A trader sold five July put options, each at $7.60, pledging to buy 500 shares of Galaxy Carpets Co. at a price of $13.50 per share. If at maturity of the contract, Galaxy Carpet's stock is trading at $9.30 per share, then which of the following statements accurately describes the net cash flow of the transaction?
A
The trader profited $3,800 from the transaction.
B
The trader lost $2,100 from the transaction.
C
The trader profited $2,100 from the transaction.
D
The trader profited $1,700 from the transaction.
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