Question

The stock price of BAC is currently $150 and a put option with
strike price of $150 is $10. A trader goes long 300 shares of BAC
stock and long 3 contracts of the put options with strike price of
$150.

a. What is the maximum potential loss for the trader?(sample
answer: $105.75)

b. When the stock price is $161 on the expiration, what is the
trader’s net profit?(sample answer: $105.75)

Answer #1

a. X = $150

P = $10

The maximum loss of this position occurs when the stock price falls below (X - P) = 150 - 10 = $140

That is when the stock price falls below, St = 140

The maximum loss = (Purchase price of the stock - St + P) * Number of shares

The maximum loss = (150 - 140 + 10) * 300

The maximum loss = 20 * 300

The maximum loss = $6,000

b. When St = 161

Net profit = (St - Stock purchase price - P) * Number of shares

Net profit = (161 - 150 - 10) * 300

**Net profit = $300**

can someone explain?
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