Loss on IBM October 80 Put Contract

B

To calculate the loss on the contract, we need to consider the premium paid for the put option and the stock price at expiration.

Jack Cheney purchased an IBM October 80 put contract for a premium of $5. This means that he paid $5 per share for the right to sell IBM stock at a strike price of $80 until the expiration date.

At expiration, the IBM stock sells for $78 per share. Since the stock price is below the strike price of $80, the put option is "in the money" and has value.

To determine the loss on the contract, we need to calculate the difference between the strike price and the stock price at expiration, and subtract the premium paid.

Loss on the contract = (Strike price - Stock price at expiration) - Premium

In this case: Loss on the contract = ($80 - $78) - $5 = $2 - $5 = -$3

Therefore, the loss on the contract is -$3, which means that Jack Cheney incurred a loss of $3.

The correct answer is B. -$3.