The breakeven price of a short put position is $45.00 for a stock. The premium received for the put position is $2.50. What will be the profit on the position at expiration if the stock ends at $46.50?

A. -$1.00
B. $1.50
C. $2.50

Correct Answer: B

The breakeven price for a short put position is equal to the exercise price minus the premium paid for the put option. Therefore, X - 2.5 = 45 =>X = $47.50. Value of put option at expiration = Max(0, X-ST) = 47.50 - 46.50 = $1.00. Profit for the short position = Put premium - Value of put option = 2.50 - 1.00 = $1.50. Or the profit of a short put option equals spot price at expiration minus breakeven price.