You can buy a 6-month put contract (i.e., for 100 shares) with an exercise price

ID: 2727244 • Letter: Y

Question

You can buy a 6-month put contract (i.e., for 100 shares) with an exercise price of $50 for a cost of $4.15 * 100. Assume the risk-free rate is 0%.

a. What is your dollar profit (loss) and percentage return if you purchase one put contract, and in 6 months the underlying stock is selling for $40?

b. What is your dollar profit (loss) and percentage return if you purchase one put contract, and in 6 months the underlying stock is selling for $45?

c. What is your dollar profit (loss) and percentage return if you buy one put contract, and in 6 months the underlying stock is selling for $50?

A put option gives the holder the right to sell a stock at a fixed price .

In this example the holder of the put option can sell his stock at an exercise price of $ 50 even if the underlying stock is selling for less .

1) What is your dollar profit (loss) and percentage return if you purchase one put contract, and in 6 months the underlying stock is selling for $40?

Profit or loss = 100 X $ 50 - $ 4.15 X 100 - 40 X $100

Profit = $ 585

% return = 100 X 5.85/50

% return = 11.70 %

2) What is your dollar profit (loss) and percentage return if you purchase one put contract, and in 6 months the underlying stock is selling for $45?

Profit or loss = 100 X $ 50 - $ 4.15 X 100 - 45 X $100

Profit = $ 85

% profit = 100X0.85/50

% profit = 1.70%

3) What is your dollar profit (loss) and percentage return if you buy one put contract, and in 6 months the underlying stock is selling for $50?

Profit or loss = 100 X $ 50 - $ 4.15 X 100 - 50 X $100

loss = -$ 415

% loss = -4.15 X 100 /50

% loss = -8.3%

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