You Sold Twenty Put Contracts on Twin City Stock at an Option

question 297

Multiple Choice

You sold twenty put contracts on Twin City stock at an option premium of $.90. The options have an exercise price of $27.50. The options were exercised today when the stock price was $22.40 a share. What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $22.40? Ignore transaction costs and taxes.

• A) -$12,000
• B) -$8,400
• C) $1,800
• D) $8,400
• E) $12,000

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Definitions:

Treasury Stock

Stock that has been issued but has been bought back by the corporation or received as a gift.

Net Cash

Describes the amount of cash remaining after all cash expenditures, or disbursements, are subtracted from the cash receipts during a given period.

Indirect Method

A method used in accounting to calculate cash flows from operating activities, adjusting net income by changes in non-cash accounts.

Direct Method

A technique used in cash flow statements to present cash activities directly related to operating activities.