SIE Exam Question 431: Answer and Explanation

Question: 431

Blake goes long 1 ABC Jan 40 put @ 7 when the market is 42. 7 months later, Blake closes the contract at intrinsic value when the market is at 39. What is the gain or loss?

• A. -$600
• B. $600
• C. $700
• D. $500

Correct Answer: A

Explanation:

A: The intrinsic value of an option is the difference between the strike price (40) and the market price (39) if the contract is in the money. Puts are in the money when the market price is lower than the strike price. Therefore, the intrinsic value is $1. The option was purchased for $7 and later sold for $1 (the intrinsic value), netting an overall loss of $600 (-$6 x 100).