You buy (long) a European put option with strike $100. On the expiration date the price of the underlying stock is $125. What is your cash flow at expiration? (Please use a minus sign to indicate a negative cash flow)

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BlackTom AI · Accepted Answer

We begin by identifying the payoff of a long European put option at expiration. A put gives the holder the right to sell the underlying at the strike price K, so the intrinsic value at expiration is max(K − S, 0).

In this scenario, the strike is K = 100 and the underlying stock price at expiration is S = 125. Since 100 − 125 = −25, the intrinsic value is max(−25, 0) = 0. This means the put is out-of-the-money at expiration and would expire worthless.

Therefore, the cash flow from exercising the put at expiration is 0, because there is no exercise that would yield a positive amount. The sign convention in the prompt asks to use a minus sign to indicate a negative cash flow; however, since the payoff is zero, there is no negative cash flow to report.

If one were tracking the total realized cash flow for the position, it would include any premium paid upfront (a cash outflow) plus the expiration payoff (which is zero). But with only the expiration payoff in focus, the number is zero.

Key checks to avoid confusion:
- Payoff formula for a long put: max(K − S, 0).
- If S > K (as in this case), payoff is zero.
- The expiration cash flow from exercising the put is nonnegative, and here it is exactly zero, not negative.

Thus, the expiration cash flow of the long European put in this situation is 0.

BU.232.710.W2.SP25 Quiz 2- Requires Respondus LockDown Browser

You buy (long) a European put option with strike $100. On the expiration date the price of the underlying stock is $125. What is your cash flow at expiration? (Please use a minus sign to indicate a negative cash flow)

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