Series 7 Exam Question 253: Answer and Explanation

Question: 253

Grant Goldbarr purchased 1 ABC 60 put at 3.50 and purchased 100 shares of ABC at 62. Six months later, with ABC trading at 64, Grant closes his put for 0.75 and sells his stock at the market price. What is Grant's gain or loss as a result of these transactions?

• A. $75 loss
• B. $75 gain
• C. $275 loss
• D. $275 gain

Correct Answer: A

Explanation:

A. The easiest way for you to see what's going on is to set up an options chart. Because Grant bought the put for 350 (3.50 × 100 shares per option) and the stock for 6,200 (62 × 100 shares), you need to put "350" and "6,200" in the "Money Out" side of the chart. Next, Grant sold the stock for $6,400 (64 × 100 shares) and closed (do the opposite — if originally you bought, to close you have to sell) the option for $75 (0.75 × 100 shares per option). So, you have to put "$6,400" and "$75" in the "Money In" side of the chart. Total up the two sides, and you see that he had a $75 loss.