✏️ Practice with Calls and Puts

✏️ Mixed Call and Put #1

✏️ You have Bought a K=$52 Call. It is about to expire. Suppose S=$51 and Premium=$2.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$2.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$51 for K=$52.

You could easily purchase the stock on the open market for $51, so exercising the option would mean overpaying by $1. We would think of this as a per-share $1 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $2 premium you paid. In hindsight, this money was wasted. P/L = -$2 (per share). Better luck next time!

✏️ Mixed Call and Put #2

✏️ You have Bought a K=$86 Call. It is about to expire. Suppose S=$87 and Premium=$2.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = -$1.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$87 for K=$86. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$86.

That is a discount of $1, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $1. This $1 is the option's intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$86 and then turn around and sell them on the market for S=$87, netting a $1 profit. You could even take out a short-term loan to do this.)

In addition to the $1 gain, you also paid a premium of $2. Therefore, your final P/L combines the $1 gain and the $2 loss: P/L = $1 - $2 = -$1 (per share).

✏️ Mixed Call and Put #3

✏️ You have Sold/Written a K=$48 Put. It is about to expire. Suppose S=$51 and Premium=$2.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = $2.

Full Explanation:

You have sold an option that obligates you to buy shares of stock worth S=$51 for K=$48 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$48.

There is no way for your counterparty to make money by selling you shares worth $51 for only $48. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $2 premium your counterparty paid you. P/L = $2 (per share).

✏️ Mixed Call and Put #4

✏️ You have Bought a K=$87 Call. It is about to expire. Suppose S=$94 and Premium=$1.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $6.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$94 for K=$87. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$87.

That is a discount of $7, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $7. This $7 is the option's intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$87 and then turn around and sell them on the market for S=$94, netting a $7 profit. You could even take out a short-term loan to do this.)

In addition to the $7 gain, you also paid a premium of $1. Therefore, your final P/L combines the $7 gain and the $1 loss: P/L = $7 - $1 = $6 (per share).

✏️ Mixed Call and Put #5

✏️ You have Bought a K=$47 Put. It is about to expire. Suppose S=$52 and Premium=$2.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$2.

Full Explanation:

This Long Put allows you to sell shares of stock worth S=$52 for K=$47.

There is no way to make money by selling something worth S=$52 for only K=$47. Because you can’t exercise the option to make money, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

If you had shares you wanted to sell, you could easily sell them on the open market for $52. Exercising the option would mean being underpaid by $5, which we would think of as a $5 loss.

Clearly, you won’t exercise the option, so it will just expire unexercised.

The only impact on your P/L is the $2 premium you paid. In hindsight, this money was wasted. P/L = -$2 (per share). Better luck next time!

✏️ Mixed Call and Put #6

✏️ You have Bought a K=$69 Call. It is about to expire. Suppose S=$65 and Premium=$4.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$4.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$65 for K=$69.

You could easily purchase the stock on the open market for $65, so exercising the option would mean overpaying by $4. We would think of this as a per-share $4 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!

✏️ Mixed Call and Put #7

✏️ You have Bought a K=$31 Call. It is about to expire. Suppose S=$30 and Premium=$2.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$2.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$30 for K=$31.

You could easily purchase the stock on the open market for $30, so exercising the option would mean overpaying by $1. We would think of this as a per-share $1 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $2 premium you paid. In hindsight, this money was wasted. P/L = -$2 (per share). Better luck next time!

✏️ Mixed Call and Put #8

✏️ You have Sold/Written a K=$61 Call. It is about to expire. Suppose S=$69 and Premium=$2.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = -$6.

Full Explanation:

You have sold an option that obligates you to sell shares of stock worth S=$69 for only K=$61 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$61.

By purchasing your shares worth $69 for only $61 (a discount of $8), your counterparty can make $8 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $8 for its owner.

We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$61. This will cause a loss for you of $8. For example, if you own the shares, you will have to sell them for $8 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $69 and sell them for $8 less. Either way, you are $8 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $8 richer. The IV of the option is both your loss and their gain.)

Offsetting the $8 loss from selling the shares, you also received a premium of $2. Your final per-share premium is P/L = $2 - $8 = -$6.

(For comparison, your counterparty's final P/L is $6. As always, one party's gain is the other party's loss.)

✏️ Mixed Call and Put #9

✏️ You have Sold/Written a K=$62 Put. It is about to expire. Suppose S=$65 and Premium=$2.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = $2.

Full Explanation:

You have sold an option that obligates you to buy shares of stock worth S=$65 for K=$62 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$62.

There is no way for your counterparty to make money by selling you shares worth $65 for only $62. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $2 premium your counterparty paid you. P/L = $2 (per share).

✏️ Mixed Call and Put #10

✏️ You have Bought a K=$82 Call. It is about to expire. Suppose S=$77 and Premium=$3.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$3.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$77 for K=$82.

You could easily purchase the stock on the open market for $77, so exercising the option would mean overpaying by $5. We would think of this as a per-share $5 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $3 premium you paid. In hindsight, this money was wasted. P/L = -$3 (per share). Better luck next time!

✏️ Mixed Call and Put #11

✏️ You have Sold/Written a K=$80 Call. It is about to expire. Suppose S=$81 and Premium=$3.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $2.

Full Explanation:

You have sold an option that obligates you to sell shares of stock worth S=$81 for only K=$80 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$80.

By purchasing your shares worth $81 for only $80 (a discount of $1), your counterparty can make $1 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $1 for its owner.

We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$80. This will cause a loss for you of $1. For example, if you own the shares, you will have to sell them for $1 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $81 and sell them for $1 less. Either way, you are $1 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $1 richer. The IV of the option is both your loss and their gain.)

Offsetting the $1 loss from selling the shares, you also received a premium of $3. Your final per-share premium is P/L = $3 - $1 = $2.

(For comparison, your counterparty's final P/L is -$2. As always, one party's gain is the other party's loss.)

✏️ Mixed Call and Put #12

✏️ You have Bought a K=$55 Call. It is about to expire. Suppose S=$61 and Premium=$3.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $3.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$61 for K=$55. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$55.

That is a discount of $6, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $6. This $6 is the option's intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$55 and then turn around and sell them on the market for S=$61, netting a $6 profit. You could even take out a short-term loan to do this.)

In addition to the $6 gain, you also paid a premium of $3. Therefore, your final P/L combines the $6 gain and the $3 loss: P/L = $6 - $3 = $3 (per share).

✏️ Mixed Call and Put #13

✏️ You have Sold/Written a K=$89 Call. It is about to expire. Suppose S=$94 and Premium=$3.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = -$2.

Full Explanation:

You have sold an option that obligates you to sell shares of stock worth S=$94 for only K=$89 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$89.

By purchasing your shares worth $94 for only $89 (a discount of $5), your counterparty can make $5 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $5 for its owner.

We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$89. This will cause a loss for you of $5. For example, if you own the shares, you will have to sell them for $5 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $94 and sell them for $5 less. Either way, you are $5 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $5 richer. The IV of the option is both your loss and their gain.)

Offsetting the $5 loss from selling the shares, you also received a premium of $3. Your final per-share premium is P/L = $3 - $5 = -$2.

(For comparison, your counterparty's final P/L is $2. As always, one party's gain is the other party's loss.)

✏️ Mixed Call and Put #14

✏️ You have Bought a K=$79 Put. It is about to expire. Suppose S=$87 and Premium=$1.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$1.

Full Explanation:

This Long Put allows you to sell shares of stock worth S=$87 for K=$79.

There is no way to make money by selling something worth S=$87 for only K=$79. Because you can’t exercise the option to make money, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

If you had shares you wanted to sell, you could easily sell them on the open market for $87. Exercising the option would mean being underpaid by $8, which we would think of as a $8 loss.

Clearly, you won’t exercise the option, so it will just expire unexercised.

The only impact on your P/L is the $1 premium you paid. In hindsight, this money was wasted. P/L = -$1 (per share). Better luck next time!

✏️ Mixed Call and Put #15

✏️ You have Bought a K=$88 Call. It is about to expire. Suppose S=$81 and Premium=$4.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$4.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$81 for K=$88.

You could easily purchase the stock on the open market for $81, so exercising the option would mean overpaying by $7. We would think of this as a per-share $7 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!

✏️ Mixed Call and Put #16

✏️ You have Bought a K=$45 Call. It is about to expire. Suppose S=$39 and Premium=$3.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$3.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$39 for K=$45.

You could easily purchase the stock on the open market for $39, so exercising the option would mean overpaying by $6. We would think of this as a per-share $6 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $3 premium you paid. In hindsight, this money was wasted. P/L = -$3 (per share). Better luck next time!

✏️ Mixed Call and Put #17

✏️ You have Sold/Written a K=$33 Put. It is about to expire. Suppose S=$32 and Premium=$2.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $1.

Full Explanation:

You have sold an option that obligates you to buy shares of stock worth S=$32 for K=$33 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$33.

By selling shares worth $32 for $33 (a premium of $1), your counterparty can make $1 per share (at your expense). Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $1 for its owner.

We’ll assume your counterparty will exercise the option. Your counterparty will “Put” the shares out there and you will have to buy them for $33. The shares are only worth $32, so you will overpay by $1. Just as your counterparty gains $1, you lose $1. The IV of the option is both their gain and your loss.

Offsetting your $1 loss from selling the shares, you have also already received a premium of $2 from your counterparty. Your final per-share premium is P/L = $2 - $1 = $1.

(For comparison, your counterparty's final P/L is -$1. As always, one party's gain is the other party's loss.)

✏️ Mixed Call and Put #18

✏️ You have Bought a K=$43 Call. It is about to expire. Suppose S=$48 and Premium=$4.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $1.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$48 for K=$43. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$43.

That is a discount of $5, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $5. This $5 is the option's intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$43 and then turn around and sell them on the market for S=$48, netting a $5 profit. You could even take out a short-term loan to do this.)

In addition to the $5 gain, you also paid a premium of $4. Therefore, your final P/L combines the $5 gain and the $4 loss: P/L = $5 - $4 = $1 (per share).

✏️ Mixed Call and Put #19

✏️ You have Bought a K=$33 Call. It is about to expire. Suppose S=$26 and Premium=$4.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = -$4.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$26 for K=$33.

You could easily purchase the stock on the open market for $26, so exercising the option would mean overpaying by $7. We would think of this as a per-share $7 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!

✏️ Mixed Call and Put #20

✏️ You have Bought a K=$48 Call. It is about to expire. Suppose S=$56 and Premium=$1.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $7.

Full Explanation:

This Long Call allows you to buy shares of stock worth S=$56 for K=$48. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K=$48.

That is a discount of $8, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $8. This $8 is the option's intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$48 and then turn around and sell them on the market for S=$56, netting a $8 profit. You could even take out a short-term loan to do this.)

In addition to the $8 gain, you also paid a premium of $1. Therefore, your final P/L combines the $8 gain and the $1 loss: P/L = $8 - $1 = $7 (per share).

✏️ Mixed Call and Put #21

✏️ You have Sold/Written a K=$76 Call. It is about to expire. Suppose S=$84 and Premium=$1.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = -$7.

Full Explanation:

You have sold an option that obligates you to sell shares of stock worth S=$84 for only K=$76 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Call, they have a Long Call. They decide whether to exercise the Long Call they purchased. If they do, you must sell them 100 shares of the underlying stock for K=$76.

By purchasing your shares worth $84 for only $76 (a discount of $8), your counterparty can make $8 per share. Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $8 for its owner.

We’ll assume your counterparty will exercise the option. They will “Call” for your shares to purchase them for K=$76. This will cause a loss for you of $8. For example, if you own the shares, you will have to sell them for $8 less than you could get on the open market. Alternatively, if you don’t have the shares, you’ll have to buy them for $84 and sell them for $8 less. Either way, you are $8 poorer than you would be if your counterparty hadn't exercised the option. (Correspondingly, they are $8 richer. The IV of the option is both your loss and their gain.)

Offsetting the $8 loss from selling the shares, you also received a premium of $1. Your final per-share premium is P/L = $1 - $8 = -$7.

(For comparison, your counterparty's final P/L is $7. As always, one party's gain is the other party's loss.)

✏️ Mixed Call and Put #22

✏️ You have Sold/Written a K=$30 Put. It is about to expire. Suppose S=$35 and Premium=$1.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = $1.

Full Explanation:

You have sold an option that obligates you to buy shares of stock worth S=$35 for K=$30 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$30.

There is no way for your counterparty to make money by selling you shares worth $35 for only $30. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $1 premium your counterparty paid you. P/L = $1 (per share).

✏️ Mixed Call and Put #23

✏️ You have Sold/Written a K=$59 Put. It is about to expire. Suppose S=$58 and Premium=$2.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $1.

Full Explanation:

You have sold an option that obligates you to buy shares of stock worth S=$58 for K=$59 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$59.

By selling shares worth $58 for $59 (a premium of $1), your counterparty can make $1 per share (at your expense). Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $1 for its owner.

We’ll assume your counterparty will exercise the option. Your counterparty will “Put” the shares out there and you will have to buy them for $59. The shares are only worth $58, so you will overpay by $1. Just as your counterparty gains $1, you lose $1. The IV of the option is both their gain and your loss.

Offsetting your $1 loss from selling the shares, you have also already received a premium of $2 from your counterparty. Your final per-share premium is P/L = $2 - $1 = $1.

(For comparison, your counterparty's final P/L is -$1. As always, one party's gain is the other party's loss.)

✏️ Mixed Call and Put #24

✏️ You have Bought a K=$73 Put. It is about to expire. Suppose S=$69 and Premium=$4.

1. Will you exercise this option?
2. What is your Per-Share Profit or Loss (P/L)?

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Short Answer:

1. In The Money, so WILL be exercised.
2. P/L = $0.

Full Explanation:

This Long Put allows you to sell shares of stock worth S=$69 for K=$73. $73 is a great price for something only worth $69. It's a $4 premium.

A mnemonic is that you can “Put” the shares out on the market and someone else (your counterparty) will have to buy them for K=$73.

If you have shares you want to sell, you can exercise the option to sell them for $4 extra. If you don’t have shares you want to sell, you could easily borrow money and buy the shares for $69 on the open market. You then exercise your option to sell the same shares for $73, pocketing a $4 profit.

Either way, the option “In The Money (ITM)”. You will exercise it to gain the option’s intrinsic value of $4.

In addition to the $4 gain, you also paid a premium of $4. Therefore, your final P/L combines the $4 gain and the $4 loss: P/L = $4 - $4 = $0 (per share).

✏️ Mixed Call and Put #25

✏️ You have Sold/Written a K=$46 Put. It is about to expire. Suppose S=$48 and Premium=$1.

1. Will this option be exercised?
2. What is your Per-Share Profit or Loss (P/L)?

✔ Click here to view answer

Short Answer:

1. Out of The Money, so WON'T be exercised.
2. P/L = $1.

Full Explanation:

You have sold an option that obligates you to buy shares of stock worth S=$48 for K=$46 if requested.

You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$46.

There is no way for your counterparty to make money by selling you shares worth $48 for only $46. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $1 premium your counterparty paid you. P/L = $1 (per share).