I am having a problem figuring out the last 6 at the bottom A put option in fina

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I am having a problem figuring out the last 6 at the bottom

A put option in finance allows you to sell a share of stock at a given price in the future. There are different types of put options. Let us consider the European put option which allows you to sell a share of stock at a given price called the exercise price, at a particular point in time after the purchase of the European put option. For example, suppose you purchase a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If for example, the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26- $22.50 = $3.50 per share less the cost of the option. If you paid $1.00 per put option, then you profit would be $3.50-$1.00 = $2.50 per share.

Build a model in Excel to calculate the profit the European put option described above. Construct a data table in Excel that shows the profit per share for a share price in six months between $10 and $30 per share in increments of $1.00. Complete the given table below.

If required, round your answers to two decimal places. For subtractive or negative numbers use a minus sign

Share Price   Profit Per Share
$10.00   $15
$11.00   $14
$12.00   $13
$13.00   $12
$14.00   $11
$15.00   $10
$16.00   $9
$17.00   $8
$18.00   $7
$19.00   $6
$20.00   $5
$21.00   $4
$ 22.00   $3
$23.00   $2
$24.00   $1
$25.00   $0
$26.00   $-1
$27.00   $? (The answer is not -2 or 0)
$28.00   $?(The answer is not -3 or 0)
$29.00   $?(The answer is not -4 or 0)
$30.00   $?(The answer is not -5 or 0)

Explanation / Answer

If you buy an European put option, it is worth exercising this option if the price falls below the exercise price.

In the given data you have assumed the exercise price to be $ 26, option price to be $ 1 , and hence you have rightly computed all the profit figures from share price of $10 to $ 26

i.e. Exercise price - Option price - share price, so for share price of 22

profit per share = 26 -1 -22 = $ 3, which becomes 0 at $ 25 share price

Now at share price of $ 26 there is no point to exercise your option, so your loss is your premium of $ 1

(It is worth exercising even at few cents below $ 26 i.e. say share price of $ 25.75, you may earn those few cents and reduce your loss, subject to transaction costs...practically speaking)

Same applies to all prices above $ 26, for instance if the price is at $ 27, there is no point of buying the share at $ 27 and then selling it at $ 26, so here you will decide not to exercise your option and let go of your premium, so in any case your max loss is equal to your option premium

So, for share price of $ 27, $ 28 or even $ 100 your loss would be $1 per share

(Profit of - $1 per share)

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