Understanding Put Options

The video tutorial explains the concept of put options, focusing on their payoff at expiration based on stock prices. It covers the profit and loss analysis for both the option holder and the writer, highlighting the cost of the option and the responsibilities of the writer. The tutorial uses payoff diagrams to illustrate these concepts, showing how the holder's and writer's payoffs are mirror images. The video concludes with an analysis of the writer's profit and loss scenarios, emphasizing the financial outcomes when the option is exercised or not.

What is the value of a put option if the stock price drops to zero?

• $0

• $10

• $50

• $60

Why would a put option become worthless if the stock price is at the exercise price?

• Because the option is in the money

• Because the option is above the money

• Because the option is out of the money

• Because the option is at the money

How is the actual profit and loss at expiration calculated for a put option?

• By adding the option cost to the payoff

• By subtracting the option cost from the payoff

• By multiplying the option cost with the payoff

• By dividing the option cost by the payoff

What happens to the profit if the stock price is $50 at expiration?

• The profit is $10

• The profit is $40

• The profit is $0

• The profit is $50

Who is responsible for creating the put option?

• The buyer of the put

• The broker

• The writer of the put

• The stock exchange

What is the relationship between the payoff diagrams of the put buyer and the put writer?

• They are perpendicular

• They are unrelated

• They are identical

• They are mirror images

What happens to the writer of the put option if the option is not exercised?

• They lose $10

• They gain $10

• They lose $50

• They gain $50

What is the loss for the writer if the stock price falls to zero?

• $10

• $40

• $50

• $0

What is the net profit for the writer if the stock price is $50 at expiration?

• $10

• $0

• $40

• $50

How does the writer's profit and loss diagram compare to the buyer's?

• It is identical

• It is the opposite

• It is the same

• It is unrelated