Series 7 question

Question

An investor buys 100 shares of GHI at $60 and buys a GHI Oct 60 put for 7. If the investor sells the stock for $65 and closes the put for 3, what is the gain or loss?

A. $400 gain

B. $400 loss

C. $100 gain

D. $100 loss

Answer 1

Great question. In this scenario, this investor is buying the put as "insurance" in case the stock loses all value

(because when you buy a stock, you want it to go to new highs instead of falling to zero unless you have a Brewster's Millions type situation going on)

In this case, our investor's fears of their GHI stock losing value did not come true - instead, they were able to sell it for $65 per share after buying it for $60 per share, therefore scoring $500 on those 100 shares.

On the put, however, the premium on it began to lose value when the stock price began to climb. It was purchased for 7 and sold for 3, which results in the investor losing $400 on the put.

Since the +$500 gained on the stock and the -$400 lost on the put option leaves our investor with a total gain of +$100, that means the answer to this question is C.