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Hello the question I was asked was What is the payoff at expiration of a protective put (a portfolio consisting of one share of stock and one put option on that stock with strike price K) if the price of the stock ST is below the exercise price of the option K?

I said that the payoff should be 0 and not K-ST when if K is larger than ST it will give us a negative payoff, and having a negative profit is not possible so the answer should be 0?

Please advise

practice question Notesfrom lecture

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  • See attached photos
    – Johnny Drut
    Commented May 8, 2019 at 21:59

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... if the price of the stock ST is below the exercise price of the option K?

I said that the payoff should be 0 and not K-ST when if K is larger than ST it will give us a negative payoff, and having a negative profit is not possible so the answer should be 0?

If ST is less than K then K - ST is a positive number

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  • Hi, thanks for answer. Makes total sense. I think I was a bit confused
    – Johnny Drut
    Commented May 8, 2019 at 22:16
  • I have no idea why they included one share in the question. It's not exactly a portfolio :->)
    – Bob Baerker
    Commented May 8, 2019 at 22:17

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