You buy a European put option with strike
𝐾
1
and short a European put option with strike
𝐾
2

𝐾
1
on the same underlying asset with the same expiration at T. If
𝑆
𝑇

𝐾
2
, do you make an overall profit?

Question

You buy a European put option with strike 
𝐾
1
 and short a European put option with strike 
𝐾
2
>
𝐾
1
 on the same underlying asset with the same expiration at T. If 
𝑆
𝑇
>
𝐾
2
, do you make an overall profit?

BlackTom AI · Accepted Answer

The question describes a position consisting of a long European put with strike K1 and a short European put with strike K2, where K2 > K1, both expiring at T, and asks about profit when ST > K2.
Option 1: 'No, you make a loss' — This would require the combined payoff to be negative. However, when ST > K2 > K1, the long put with strike K1 has payoff max(K1 − ST, 0) = 0, and the short put with strike K2 has payoff −max(K2 − ST, 0) = −0 = 0. The total payoff is 0, not negative, so this option misstates the outcome.
Option 2: 'There is not enough information to answer this question' — Given the explicit condition ST > K2, we can determine the payoff deterministically: both puts expire worthless, yielding zero net payoff. Therefore, there is enough information to answer, and this option is incorrect.
Option 3: 'Yes, you make a profit' — Since both put options expire worthless in this scenario, there is no profit. The long put pays 0 and the short put also pays 0, so the net outcome is not a profit. This option is incorrect as stated.
In this setup, the actual realized payoff is 0 (break-even) when ST > K2, because each put finishes out of the money. The provided options do not include a statement that reflects a zero payoff (break-even) outcome, which is the precise result under ST > K2. Consequently, all listed choices mischaracterize the payoff in this scenario.

BU.232.710.W2.SP25 Final: Part 1 - Requires Respondus LockDown Browser

You buy a European put option with strike 𝐾 1 and short a European put option with strike 𝐾 2 > 𝐾 1 on the same underlying asset with the same expiration at T. If 𝑆 𝑇 > 𝐾 2 , do you make an overall profit?

View Explanation

Log in for full answers

Similar Questions

You buy a put option with a strike price of $110 for $7 and sell a put option with a strike price of $95 for $2 on the same stock (same expiry). The contract size (multiplier) is 1 share per option contract. What is the maximum profit at the expiry in dollars?

You buy a European put option with strike 𝐾 1 and short a European put option with strike 𝐾 2 > 𝐾 1 on the same underlying asset with the same expiration at T . When you set up the position at 𝑡 , do you receive a cash inflow or a cash outflow?

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

Which of the following statement regarding cost is correct:

Under the assumptions used in cost-volume-profit analysis, as the activity increases:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler