Short Puts P/L Flashcards
Short K=$54 Put
S=$49 and Premium=$4
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = -$1.
Full Explanation:
You have sold an option that obligates you to buy shares of stock worth S=$49 for K=$54 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$54.
By selling shares worth $49 for $54 (a premium of $5), your counterparty can make $5 per share (at your expense). Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $5 for its owner.
We’ll assume your counterparty will exercise the option. Your counterparty will “Put” the shares out there and you will have to buy them for $54. The shares are only worth $49, so you will overpay by $5. Just as your counterparty gains $5, you lose $5. The IV of the option is both their gain and your loss.
Offsetting your $5 loss from selling the shares, you have also already received a premium of $4 from your counterparty. Your final per-share premium is P/L = $4 - $5 = -$1.
(For comparison, your counterparty’s final P/L is $1. As always, one party’s gain is the other party’s loss.)
Short K=$53 Put
S=$54 and Premium=$4
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = $4.
Full Explanation:
You have sold an option that obligates you to buy shares of stock worth S=$54 for K=$53 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$53.
There is no way for your counterparty to make money by selling you shares worth $54 for only $53. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).
Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $4 premium your counterparty paid you. P/L = $4 (per share).
Short K=$30 Put
S=$36 and Premium=$2
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = $2.
Full Explanation:
You have sold an option that obligates you to buy shares of stock worth S=$36 for K=$30 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$30.
There is no way for your counterparty to make money by selling you shares worth $36 for only $30. Therefore, we say this option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).
Given this, your counterparty won’t exercise the option. The only impact on your P/L is the $2 premium your counterparty paid you. P/L = $2 (per share).
Short K=$67 Put
S=$66 and Premium=$2
a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?
Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”
Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = $1.
Full Explanation:
You have sold an option that obligates you to buy shares of stock worth S=$66 for K=$67 if requested.
You can think of yourself as being matched with a “counterparty” who purchased the option you wrote/sold. Just as you have a Short Put, they have a Long Put. They decide whether to exercise the Long Put they purchased. If they do, you must buy 100 shares of the underlying stock from them for K=$67.
By selling shares worth $66 for $67 (a premium of $1), your counterparty can make $1 per share (at your expense). Therefore, we say the option is “In The Money (ITM)” and has an Intrinsic Value of $1 for its owner.
We’ll assume your counterparty will exercise the option. Your counterparty will “Put” the shares out there and you will have to buy them for $67. The shares are only worth $66, so you will overpay by $1. Just as your counterparty gains $1, you lose $1. The IV of the option is both their gain and your loss.
Offsetting your $1 loss from selling the shares, you have also already received a premium of $2 from your counterparty. Your final per-share premium is P/L = $2 - $1 = $1.
(For comparison, your counterparty’s final P/L is -$1. As always, one party’s gain is the other party’s loss.)
