An investor will likely exercise a put option when the price of the stock is:
A) Above the strike price
B) Below the strike price plus the premium
C) Below the strike price
A) is clearly incorrect. I picked B), but the answer is C). The explanation is that the premium is used to determine the net profit to each party.
Is this because the long put investor will still exercise the option when the stock price is below the strike price but not below the strike price with the premium? Since the long put investor will lose less if he exercises below the strike price than if he wouldn’t (ie. if premium is $5, strike price = 50, stock price = 48, the investor will still exercise because he would lose 3 instead of 5?)?