Suppose you believe that Du Pont\'s stock price is going to decline from its cur

Question

Suppose you believe that Du Pont's stock price is going to decline from its current level of $ 84.24 sometime during the next 5 months. For $ 493.72 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $ 78 per share. If you bought a 100-share contract for $ 493.72 and Du Pont's stock price actually changed to $ 81.36 , your net profit (or loss) after exercising the option would be ______? Show your answer to the nearest .01. Do not use $ or , signs in your answer. Use a - sign if you lose money on the contract.

Explanation / Answer

You have bought PUT options which gives right to sell in future for pre-specified price.

Put option = max (0,X-S)

As per example, X=78, S=81.36

Put option = max (0,78-81.36) = max(0,3.36) = 0

You will not execute the put option. Your loss is limited to the premium you paid which is $493.72.

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