Short Answer 
The investor’s initial revenue from short selling 100 shares at $40 each and selling a put option for $5 per share totals $4,500. After covering the short position by purchasing shares at $35 each for $3,500, the final profit is calculated to be $500 after adjusting for the put option premium.
Step 1: Calculate Initial Revenue from Short Sale
The first calculation involves the proceeds from the short sale. The investor short sells 100 shares of XYZ at $40 each. This results in an initial revenue of:
- $40 (price per share) x 100 (number of shares) = $4000
In addition to the short sale, the investor sells one put option contract for $5 per share, equating to:
- $5 (premium per share) x 100 (shares represented by the contract) = $500
Thus, the total initial revenue from both transactions is:
- $4000 (short sale) + $500 (put option) = $4500
Step 2: Determine the Cost to Cover the Short Position
The next step is to calculate how much it costs to cover the short position once the put option is exercised. The investor must purchase 100 shares at the current market price of $35:
- $35 (market price per share) x 100 (number of shares) = $3500
This amount, $3500, represents the cost to buy back the shares in order to cover the short sale. Now we update our profit calculation with this cost consideration.
Step 3: Calculate Final Profit or Loss
The final profit or loss is determined by subtracting the cost to cover the short position from the total initial revenue. We calculate this as follows:
- Profit or Loss = Total Revenue – Cost to Cover
- Profit or Loss = $4500 (total initial revenue) – $3500 (cost to cover) = $1000
However, we remember to adjust for the premium received from the put option to avoid double-counting:
- Final Profit = $1000 – $500 (put option premium) = $500
Thus, the investor’s realized profit is $500.