Question

You bought 100 Google Shares for $400 each. You also bought 1 put option on Google with a strike of $395 for $20.

a)         What is the maximum loss on your position?

b)         What is the profit on your position when the stock hits $440?

c)        Draw the profit/loss diagram for this position clearly marking the maximum loss, and breakeven .

Answer 1

A) Maximum loss would be when the share price reached 395.

Loss = [(Buying price - Option strike price)* no. of shares] + option premium

Loss = (400-395)*100 shares+ option premium = $500+$20 = $520

B) If the stock hits $440, the profit would be (440-400)*100 = 4,000,

Reducing option price from the above calculated profit, (4000 - 20)  = $3,980

C) Break even would be when there would be no loss, i.e the profit from share is equal to option premium of $20.

Let the delta price be X.

Thus, Delta price * no. of shares = Option premium

therefore 100*X=20, X = 0.5

New price = Old price + value of X

At price $395+$0.5 = $395.5, there would be breakeven