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