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.
- OliverLv 41 decade agoFavorite 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.
- MikeLv 71 decade ago
Answer A is the only one that is correct.
- MichaelLv 41 decade ago