Problem
• In March, Paul instructs a broker to sell one July put option contract on a stock. The stock price is $42 and the strike price is $40. The put option price is $3.
Under what circumstances will the trade prove to be profitable? What are the risks?
• Scott is the trader who has bought the put option sold by Paul. Scott owns the underlying stock.
What are Scott's payoff profile, and his motivation for the trade?