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On April 16, 2014, ColorCo purchased a put option for $800 on Choco common stock. The put

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On April 16, 2014, ColorCo purchased a put option for $800 on Choco common stock. The put option gives ColorCo the option to sell 5,000 shares of Choco at a strike price of $25 per share for a period of one year. The market price of a Choco share is $25 on April 16, 2014 (the intrinsic value is therefore $0). On June 30, 2014, the market price for Choco stock is $24 per share, and the time value of the option is $550.

Instructions
(a) Prepare the journal entry to record the purchase of the put option on April 16, 2014.
(b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of June 30, 2014.
(c) What was the effect on net income of entering into the derivative transaction for the 3-month period ending June 30, 2014?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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