Question

You establish a protective put position on ABC stock today by buying 100 shares of ABC stock at $30 per share and buying a 9-month put option contract on the same stock. Each put option has a strike price of $18 and a premium of $0.50. At the end of 9 months, compute the profit from the position if ABC's stock price is $40.

Answer 1

The profit is computed as shown below:

Profit from 100 shares is computed as follows:

= (Price after 9 months - Purchase price) x 100 shares

= ($ 40 - $ 30) x 100

= $ 1,000

Profit from buying put option is computed as shown below:

= (Strike price - Price at end of 9 months - premium paid) x 100

= ($ 18 - $ 40 - $ 0.50) x 100

= - $ 2,250

But loss in case of buying a put option is restricted to the amount of premium paid i.e.

= $ 0.50 x 100

= $ 50

So, the net profit will be computed as follows:

= $ 1,000 - $ 50

= $ 950

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