Strike Price

The maximum gain for the buyer of a put is:

1. A.The strike price minus the premiumCorrect - max value if the stock goes to zero.
2. B.The premiumThis is the maximum LOSS on a long put, not the maximum gain. The premium is the ceiling on what the buyer can lose; the ceiling on what the buyer can make is the strike less that premium. Reading the risk-side figure as the reward-side figure is the entire trap.
3. C.The strike price plus premiumThe premium left the buyer's pocket, so it can only reduce the net result. Adding it instead of subtracting it overstates the answer by two premiums relative to the strike-minus-premium figure the key uses.
4. D.UnlimitedUnlimited upside belongs to the long CALL, where the stock has no upper bound. A put's underlying can fall no further than zero, and that floor caps the payoff at the strike. Because a finite ceiling exists, unlimited cannot be it.

Why: A long put gains most if the stock falls to zero: strike price minus premium paid.

The buyer of a put option has acquired the right to...

1. A.Force the writer to sell them stockA put lets the holder sell TO the writer; it is a call that lets the holder buy FROM the writer.
2. B.Receive a guaranteed dividendOptions convey no dividend rights; only stock ownership does.
3. C.Buy the underlying stock at the strike priceThat is a call, not a put.
4. D.Sell the underlying stock at the strike priceCorrect — a put is the right to sell at the strike.

Why: A put gives its holder the right to SELL the underlying stock at the strike price. The writer of the put has the matching obligation to buy.

The WRITER of a put option takes on the obligation to:

1. A.Buy the underlying security at the strike price if assignedCorrect. When the put holder exercises the right to sell, the writer must take delivery and pay the strike.
2. B.Pay the option premium at expirationPremiums are paid up front by the BUYER; the writer collects the premium.
3. C.Deliver the underlying security upon exerciseDelivering shares is what a call writer (or exercising put holder) does; the put writer receives shares.
4. D.Sell the underlying security at the strike price if assignedSelling at the strike is the CALL writer's obligation, not the put writer's.

Why: Writing a put obligates the seller to BUY the underlying at the strike price if the holder exercises. The holder has the right to sell; the writer stands on the other side and must purchase. The clue is writer plus put - obligations belong to writers, rights to buyers. Review: Derivatives and Insurance Products.

A customer buys 1 ABC Jan 60 put for a premium of 3. The breakeven is:

1. A.6060 is the strike, the level at which the put may be exercised. The buyer paid 3 to acquire that right, so at 60 the position is still down the premium. The strike is where intrinsic value starts accruing, not where the trade turns even.
2. B.57Correct - 60 strike minus 3 premium.
3. C.33 is the premium in points, a cost figure rather than a stock price. Breakeven is expressed as a level the underlying must reach, and a stock trading at 3 has no bearing on a 60-strike contract.
4. D.6363 is strike plus premium, which is the breakeven for a long CALL. A put buyer profits as the stock declines, so the 3 paid has to be recovered by moving down from the 60 strike, giving 57.

Why: Put breakeven = strike price minus premium = 60 - 3 = 57.