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: 3.) Assume you just bought 100 shares of BP stock (at $35 per share). Use the October 35 put to develop a protective put strategy. What is your total return on the entire investment if the stock price falls to $25? What is your total return if the price rises to $45?

Explanation / Answer

BP Stock Purchase Price           =          $ 35

No. of Share                             =          100

Put option October Strike 35 rate        =          5.25

Contract Size                            =          100 share

Return if stock price falls to $ 25 on expiry day.

Return on stock                                = ($ 25 - $35 ) * 100 = - $ 1,000

Put

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