Anonymous
Anonymous asked in Business & FinancePersonal Finance · 1 decade ago

A Put Option Question?

In July, you purchase a September 75 put option on Keebler, Inc. common stock. You:

A) Will have a negative cash flow at the time you initiate the contract and a positive cash flow when the option expires if the stock price is less than $75 at that time.

B) Have given the seller the right to buy a share of Keebler stock at $75 sometime prior to the September expiration.

C) Will have a worthless option in August if the stock price is $80 at that time.

D) Have the right to buy a share of Keebler stock at $75 sometime prior to the September expiration.

E) Should exercise the option at expiration if the price of Keebler stock is $80.

3 Answers

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  • Oliver
    Lv 4
    1 decade ago
    Favorite Answer

    The answer is A.

    The purchase of the put option costs you money, therefore, you have a cash outflow or negative cash flow.

    The put option gives you the right but not the obligation to go short on, i.e. sell Keebler, Inc at $75 in September. Therefore, if the price is lower than $75 you will exercise your option. Your positive cash flow comes from the fact that you can buy the stock at less than $75, say $70 and can sell it at $75. Buying lower and selling higher gives you positive cash flow.

    It is not B as you have purchased the option, so you have the right to its exercise.

    It is not C as even if the stock is $80 in August it could still drop to below $75 in September.

    It is not D as a put option is the right to sell. The reverse of a put is a call option. A call option would give you the right to buy.

    It is not E as you have the right to sell at $75. You would not buy something at $80 and then sell it at $75.

  • Mike
    Lv 7
    1 decade ago

    Answer A is the only one that is correct.

  • 1 decade ago

    A

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