Just prior to the close of the markets
on the final trading day before expiration in February,
PDQ stock is trading at 28. Both contracts are closed
by the investor. What will be the profit or loss
from these transactions?
Write 1 PDQ Feb 30 Put @ 3
Long 1 PDQ Feb 40 Put @
9
a) $600 loss
b) $1,200 loss
c) $1,200 profit
d) $400 profit
Answer:
The correct answer is d.
The investor opened the spread strategy with a net
debit of $600. When he/she closes the 40 call (by selling)
the intrinsic value is 12 points (40 – 28 = 12).
When he/she closes the 30 call (by buying it back),
the intrinsic value is 2 (30 – 28 = 2). Netting
out the closing transactions, the investor sold for
12 and bought for 2 (12 – 2 = 10). The investor
closed for a net of +10 but had a -6 to open the spread
(10 – 6 = 4, or $400).
