Question

The following diagram shows the value of a put option at expiration:

Ignoring transaction costs, which of the following statements about the value of the put option at expiration is true?

a. The expiration value of the short position in the put is \(4 if the stock price is \)76.

b. The expiration value of the long position in the put is -\(4 if the stock price is \)76.

c. The long put has a positive expiration value when the stock price is below \(80.

d. The value of the short position in the put is zero for stock prices equaling or exceeding \)76.

Short answer

Option (c) is true about the put option at expiration.

Step-by-step solution

Definition of expiration value

The amount, rate or other value of underlying at expiration as calculated or published by the source agency is known as expiration value.

Explanation for correct option:

c. The long put has a positive expiration value when the stock price is below $80 because option holders exercise the put option only when the stock price is lower than the exercise price.

Explanation for incorrect option:

a. The expiration value of the short position in the put is $4 (in place of $4) if the stock price is $76. Shorting the put option means writing the put option. The put option writer has a positive payoff only when the stock price is higher than the exercise price.

b. The expiration value of the long position in the put is -$4 is wrong because the long put has a positive payoff if the stock price is lower than the exercise price.

d. The value of the short position in the put is zero for stock prices equaling or exceeding $80 and not at $76.