Question

The price of the stock is $47. A trader buys 1 put option contract on the stock with a strike price of $42 when the option price is $4. when does the trader make a profit?

Answer 1

Sol:

Stock price = $47

Strike price = $42

Put option price = $4

To compute, when does the trader make a profit:

A put option gives the right to its buyer to sell a security at a specified price on a specific future date. A trader buys a put option when he expects the stock price to fall in the future. The trader will make profit when Put option will be in the money when stock price is below the strike price.

Breakeven point = (Strike price - Premium paid)

Breakeven point = 42 - 4 = $38

Therefore the trader will make a profit in put option when the current stock price of $47 will be lower than breakeven point of $38.