Question

Currently you own no stock options Today’s data for Green Corporation, where the call and put...

Currently you own no stock options

Today’s data for Green Corporation, where the call and put have the same exercise price and expire

in one year:

strike price 32.50

put price 2.85

call price 1.65

stock price 30.00

If you construct a protective put strategy, which securities will you buy or sell, and what is your total investment today?

If stock price is $20 on the expiration date what will be the value of your portfolio (payoff) on that day, and your net profit?

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Answer #1

In a protective put strategy, the underlying stock is bought and simultaneously a put option is bought on the underlying stock.

The stock will be bought at $30, and the put option of $32.50 strike will be bought at a premium of $2.85.

If stock price is $20 on the expiration date

Value of portfolio = value of stock + value of put option

value of put option = strike price - value of stock = $32.50 - $20 = $12.50

Value of portfolio = $20 + $12.50 = $32.50

Net profit = value of portfolio - purchase price of stock - premium paid

Net profit = $32.50 - $30 - $2.85

Net profit = -$0.35

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