Assume it is June, 2010 and you are awaiting clarity on BP Assume it is June, 20

Question

Assume it is June, 2010 and you are awaiting clarity on BP

Assume it is June, 2010 and you are awaiting clarity on BP as fundamentals. As an investor, you are looking at options scenarios given the unpredictable oil spill crisis and associated firm specific risk (unsystematic risk). BP as closing price on June 8, 2010 was 34.67. Using the option prices shown below for the underlying security (BP), do the following: 2.) Now look at the October 2010 35 put. Suppose you bought this put at the price indicated. How low must BP as price fall to at expiration to break even on this option?

Explanation / Answer

From the information provided, we need to extract the last traded price of October 2012 35 put option. In order to break even, the expiration call price should be equal to the difference between the strike price and buying price of the put. The formula can be derived as follows:

Break Even Stock Price at Expiration = Strike Price - Buying Price

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Solution:

Here, Strike Price = $35 and Buying Price = $5.25 (it has been assumed that the put option was bought at $5.25, which is the last traded price of October 2010 35 put option)

Using these values in the formula provided above, we get,

Break Even Stock Price at Expiration = $35 - $5.25 = $29.75

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