You are considering purchasing a three-month put option for 100 shares of GPC st
ID: 2738707 • Letter: Y
Question
You are considering purchasing a three-month put option for 100 shares of GPC stock for $4.00 per share, or $400 for the option. The put has a strike price of $40. The current market price of the stock is $38. a) What is the time premium in dollars? b) If the price of the stock is $38 in three months, what will the intrinsic value of the put be? Is there a profit here and if so, how much? c) If the stock falls to $35 by expiration date, what will be the intrinsic value of the put? Is there a profit here and if so, how much?
Please, provide the details of calculation
Explanation / Answer
If Strike Price(X)= 40 & Current Price (C.P) = 38
Intrinsic value of put option = Strike Price(X)-Current Price (C.P)
= $40-$38 = $2
For 100 shares = 100 x 2 = $200
Time Premium = Option Price – intrinsic value
=$4-$2 = $2
For 100 shares = 100 x 2 = $200
Loss for 100 shares = $200
If Strike Price(X)= 40 & Current Price (C.P) = 35
Intrinsic value of put option = Strike Price(X)-Current Price (C.P)
= $40-$35 = $5
Profit for 1share = $5-$4 = $1
Profit for 100 shares = $100
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