If an investor writes 1 ABC May 30 put for a premium of 4, when does this position first turn profitable?

When an investor writes a put option, they collect a premium in exchange for the obligation to buy the underlying stock at a specified strike price if the option is exercised. In this scenario, the investor has written a May 30 put option for a premium of 4.

To determine when this position first turns profitable, we need to consider the effective cost basis for the investor. The strike price of the option is 30, and since the investor collected a premium of 4, their breakeven price is calculated by subtracting the premium from the strike price: 30 - 4 = 26.

This means that if the price of ABC falls to 26, the amount the investor receives from the premium will offset the obligation to purchase the stock at the strike price when the put is exercised. Therefore, the investor would start to incur a loss if the stock prices fall below 26.

The position first turns profitable when ABC is trading above this breakeven point of 26. Any trading price above 26 will result in a profit for the investor because their obligation to buy at 30 will not exceed the total gain from the premium received. Hence, the correct answer indicates profitability starts when the stock trades higher than 26.