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

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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: 6.) Now assume you own 100 shares of the stock your group has selected to present for the stock research project. Use December options to develop a protective put strategy. If the company does not have December options, use November or January options. Select the put with a strike price nearest to your company as trading price. What will your total return be if your stock price falls to 0? What if the stock price rises 100%?

Explanation / Answer

BP Stock Purchase Price           =          $ 34.67 (Purchased at market rate)

No. of Share                             =          100

Put option Jan Strike 34 rate        =          5.85

Contract Size                            =          100 share

Return if stock price falls to $ 0 on expiry day.

Return on stock                                = ($ 0 - $34.67 ) * 100 = - $ 3,467

Put

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