Question

An investor owns 5,000 shares of stock AB, which is currently trading at $100 per share....

An investor owns 5,000 shares of stock AB, which is currently trading at $100 per share. The investor is fearful of a sharp decrease of the stock price. He decides to buy 50 December 92 put option at a price of $3, paying $15,000. Note: Each put option contract provides for the right to sell 100 shares of stock. December 92 put option means that the strike price of the put is 92 and it matures in December.

If IBM stock price rises from $100 to $110, the profit associated with the passive strategy is_____ and the profit associated with the protective put strategy is____.

A. $50,000, $65,000

B. $50,000, $35,000

C. $50,000, $15,000

D. $50,000, $25,000

Homework Answers

Answer #1

Stock purchase price = $100

Strike price = $92

Put option price = $3

Stock price at expiry, St = $110

Protective put strategy: Buy stock and Buy put option

If St = 110,The profit associated with the passive strategy = (St - purchase price)*Number of shares

The profit associated with the passive strategy = (110 - 100) * 5,000

The profit associated with the passive strategy = $50,000

The profit associated with the protective put strategy = The profit associated with the passive strategy - Total put option premium

The profit associated with the protective put strategy = 50,000 - 15,000

The profit associated with the protective put strategy = $35,000

The correct answer is option B. $50,000, $35,000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
An investor owns 5,000 shares of IBM stock, $105 per share. He thinks that there is...
An investor owns 5,000 shares of IBM stock, $105 per share. He thinks that there is no large rise and possible drop in price. This investor decides to sell 50 December 110 call option at $4, receiving $20,000. Note: Each call option contract provides for the right to buy 100 shares of stock. December 110 call option means that the strike price of the call is 110 and it matures in December. If IBM stock price rises from $105 to...
What would be the profit or loss per share of stock to an investor who bought...
What would be the profit or loss per share of stock to an investor who bought the October maturity IBM call option with exercise price $100, if the stock price at the expiration of the option is $104? What about a purchaser of the put option with the same exercise price and maturity?
On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You...
On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about  downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on...
You establish a protective put position on ABC stock today by buying 100 shares of ABC...
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.
You currently own one share in IBM. The current share price (stock price) is 50. You...
You currently own one share in IBM. The current share price (stock price) is 50. You begin to notice mixed signals about IBM’s future and you fear that stock prices might fall. You want to hedge against this possibility while being able to profit from further share price increases. Call options for 1 share in IBM and a strike price of 50 are trading on the exchange for a premium of 5. Put options for 1 share in IBM and...
The recent price per share of Company X is $50 per share. Verna buys 100 shares...
The recent price per share of Company X is $50 per share. Verna buys 100 shares at $50. To protect against a fall in price, Verna buys 100 put, covering 100 shares of Company X, with a strike price of $40. The put premium is $1 per share. If Company X closes at $45 per share at the expiration of the put, and Verna sells her shares at $45. What would be Verna's total profit and loss from investing in...
Investor A sells a three-month European call option on 100 shares of a stock with a...
Investor A sells a three-month European call option on 100 shares of a stock with a strike price of $40 per share and collects a total of pays a total of $500 premium. Investor B longs a 3-month forward contract on100 shares of the same stock at a forward price of $40 per share. At which stock price in three months will these two investors have the same profit or loss? (please enter only a number without the $ sign)
3. You purchased 100 shares of JNJ stock at $50 per share. The stock is currently...
3. You purchased 100 shares of JNJ stock at $50 per share. The stock is currently selling at $45. You would like to lock up your total loss to no more than $700. Which of the following action will help you? OPTIONS; A. place a stop-buy order at $57 B. place a stop-loss order at $43 C. place a limit buy order at $53 D. place a limit sell order at $47 E. none of the above 4. Which of...
On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You...
On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire...
On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You...
On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about  downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on...