Question

Suppose you believe that Du Pont's stock price is going to decline from its current level of $ 80.66 sometime during the next 5 months. For $ 608.58 (Initial premium) you could buy a 5-month put option giving you the right to sell 100 shares at a price of $ 79 per share. If you bought a 100-share contract for $ 608.58 and Du Pont's stock price actually changed to $ 88.31 at the end of five months, your net profit (or loss) after behaving rationally on the decision to exercise the option would be ______? Show your answer to the nearest .01. Do not use $ or , signs in your answer.Use a - sign if you lose money on the contract.

Answer 1

We are given,

The strike price of Put Option = $79 per share.

A put option gives the option holder the right to sell the share if price drops below the exercise price.

It means we can sell the share at $79 if the price is below the strike price.

Share price changes to $88.31.

As the price of the share rises above the strike price, we will not exercise the put option.

The intrinsic value of put option = $0 (reason mentioned above)

Put Option premium = $608.58

Hence our Net loss will be -$608.58. As we do not exercise the put option, we incur a loss equal to the premium paid i.e., $608.58.

If you have any doubts please let me know in the comments. Please give a positive rating if the answer is helpful to you. Thanks.