You sell (short) a European put option with strike $120. 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 start by identifying the payoff of a European put option at expiration. A put option gives the holder the right to sell the underlying at the strike price K = 120. The payoff for a put at expiration is max(K − S, 0), where S is the underlying price at expiration.

Here, the expiration stock price is S = 125, which is above the strike K = 120. Therefore the intrinsic payoff of the put option is max(120 − 125, 0) = max(−5, 0) = 0. Since you are short the put, your cash flow at expiration is the negative of the put's payoff. That is, cash flow = −0 = 0.

Note about sign convention: a positive cash flow would indicate money received, while a negative cash flow would indicate money paid out. In this case, since the put is not exercised (the stock price is above the strike), there is no payment to you or from you at expiration, resulting in a zero cash flow. If there were any premia collected when entering the short position, that would be realized separately at inception, not at expiration, and is not part of the expiration cash flow calculation here.

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You sell (short) a European put option with strike $120. 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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