Question

A put option on Target stock has a price of $10 and a strike price of $100. a. Calculate the per-share payoff range for the buyer. b. Calculate the breakeven stock price for the buyer.

Answer 1

The put option strike price is $100,

the premium paid for the put option is $10,

a. the per share pay off will be :

if the stock price falls to $90, pay off will be $10

per share will $10

As the pay off a put option is (Exercise price - stock price)

if the stock price falls to $80, the pay off per share will be $20,

similarly if the stock price is $70, the pay off will be $30,

if the price falls to zero, the pay off $100,

So ,the pay off range will be $10 to $100,

b. The break even stock price is $90,

at this price the pay off will be $10, $10 is the premium paid,

So the put option holder is neither making a profit nor a loss.