Question

5. A put option in finance allows you to sell a share of stock in the future at a given price. There are different types of put options. A European put option allows you to sell a share of stock at a given price (called the exercise price) at a particular point in time after the purchase of the option. For example, suppose you purchase an eight-month European put option for a share of stock with an exercise price of $29. If eight months later, the stock price per share is $29 or more, the option has no value. If in six months time the stock price is lower than $29 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $29. If the price per share in eight months is $26.4, you can purchase a share of the stock for $26.4 and then use the put option to immediately sell the share for $29. Your profit would be the difference, $29-$26.4 = $2.6 per share, less the cost of the option. If you paid $1.5 per put option, then your profit would be $2.6-$1.5=$1.1 per share. a) Build a model to calculate the profit of this European put option. b) Construct a data table that shows the profit per share for a share price in eight months between $15 and $35 per share in increments of $1.

Answer 1

a. Put Option Payoff = Strike price - Cost - share price

b. Data Table

STOCK PRICE	EXERCISE PRICE	COST	PROFIT (EX PRICE - STOCK PRICE-COST)
15	29	1.5	12.5
16	29	1.5	11.5
17	29	1.5	10.5
18	29	1.5	9.5
19	29	1.5	8.5
20	29	1.5	7.5
21	29	1.5	6.5
22	29	1.5	5.5
23	29	1.5	4.5
24	29	1.5	3.5
25	29	1.5	2.5
26	29	1.5	1.5
27	29	1.5	0.5
28	29	1.5	-0.5
29	29	1.5	-1.5
30	29	1.5	-2.5
31	29	1.5	-3.5
32	29	1.5	-4.5
33	29	1.5	-5.5
34	29	1.5	-6.5
35	29	1.5	-7.5