Asked by Travis Williams on May 22, 2024
Verified
The maximum loss a buyer of a stock put option can suffer is equal to
A) the striking price minus the stock price.
B) the stock price minus the value of the call.
C) the put premium.
D) the stock price.
E) None of the options are correct.
Put Option
A financial contract giving the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price within a set time frame.
Put Premium
The cost associated with acquiring a put option, allowing the holder to sell an asset at a stipulated price within a specific timeframe, offering protection against asset depreciation.
- Interpret the implications of option writing and its potential risks.
Verified Answer
TN
Trinh Nguy?n
May 23, 2024
Final Answer :
C
Explanation :
The maximum loss a buyer of a stock put option can suffer is the amount paid for the put option, which is known as the put premium. This is because the buyer can choose not to exercise the option if it would result in a loss, thus forfeiting only the premium paid.
Learning Objectives
- Interpret the implications of option writing and its potential risks.