Question

suppose that a European put option to with a strike price of $70 costs $5 and is held until maturity.
a) Under what circumstances will the put option be exercised?


b) Under what circumstances the seller of the out option make a profit?

Answer 1

A) The option will be exercised if the stock price at maturity is less than $70.00. Note that if the stock price is between $65.00 and $70.00 the seller of the option makes a profit even though the option is exercised.
B) Ignoring the time value of money, the seller of the option will make a profit if the stock price at maturity is greater than $65.00. This is because the cost to the seller of the option is in these circumstances less than the price received for the option.