Question

Intel stock price is $21 and Intel stock put option with a strike price X=$25 and August expiration has a premium P=$5.5 as of right now. You just bought the put option at P=$5.5 and will hold it till the expiration date.

1) For the option premium, how much are the intrinsic value and time value? (4 points)

2) What would be your profit / loss if the stock price of Intel is $30 on the expiration date? (3 points)

  

3) What would be your profit / loss if stock price is $20 on the expiration date? (3 points)

4) On the expiration date, at what stock price will you break-even? (4 points)

Answer 1

Put option is the right to sell the underlying security at a specified price on a future date

1)Intrinsci value = Strike price - Market price

= 25-21 = $4 per share

Time value = Option premium - Intrinsic value

= 5.5 - 4

= $1.5 per share

2)The option will not be exercised as it is better to sell in the market. Loss = Premium paid

i.e. -$5.5 per share

3)Profit = (25-20-5.5)

= -$0.5 per share

4) Break even price = Strike price - premium paid

= 25 -5.5

= $19.5 per share