Question

Consider a bearish option strategy of buying one $50 strike put for $7, selling two $42 strike puts for $4 each, and buying one $37 put for $2. All options have the same maturity. Calculate the final profit (P/L) per share of the strategy if the underlying is trading at $33 at expiration.

Answer 1

Long Puts: Bought at strike $ 50 and strike $ 37 with premiums of $ 7 and $ 2 respectively.

Initial Cash Flow = -7 - 2 = - $ 9

Short Put: Sold two put options at strike $ 42 and premium of $ 4 each

Initial Cash Flow = 2 x 4 = $ 8

Net Initial Cash Flow = 8 - 9 = - $ 1

If actual asset price at expiry is $ 33, then:

$ 50 Strike Put Payoff = (50-33) = $ 17

$ 42 Strike Put Payoffs = - (42-33) x 2 = - $ 18

$ 37 Put Payoff = (37-33) = $ 4

Therefore, Net Profit = 17 - 18 + 4 - 1 = $ 2