Page 246 - A Canuck's Guide to Financial Literacy 2020

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call at a price of $0.85 with a strike price of $50. The stock is currently $55. The option is
$5. Jim would have made a profit of $4.15

If the price of the stock is below the strike price at the expiry date, then the option would be
out of the money and expire worthless. The seller who sold the option would keep any
premium that they received for the option.

Put Options

Put options are the opposite of call options. They give you the right but not the obligation to
sell a stock at the strike price by the option’s expiration date. The value of put options
increase as the price of the stock falls.

To purchase a put option, the buyer would pay the seller of the option a premium. At the
expiry date, the option may be settled or expire worthless.

For example, Jim is looking to purchase 1 put option on American Airlines. The price of an
option is currently $1.50. As each contract option represents a claim of 100 shares of the
underlying stock, the total cost for Jim to buy 1 option contract of American Airlines would
be $150. (100 Shares * 1 Contract * $1.50)

Put options would be considered in the money when the stock price is below the strike price
at the expiration date. At that date, the owner of the put option may exercise the option or
sell it at the fair market value.