Question

You bought one share of DUKE for $33.23. You want to hedge this position by buying a put option with a $30 strike price. This option is selling for $2.00. What is your profit if at expiration the stock is trading at $24?

Answer is -5.23. Please show work.

Answer 1

A put option provides the right to sell. It is the option contract which gives the holder right to sell at the strike price. The seller of the put option will have obligation to buy and the holder of the option will have option to sell.

In the given question,

Original purchase price of the share = $ 33.23

Option cost = $ 2

Strike price = $ 30

Strike price is the price at which the holder of the option can sell the share at maturity if the share is trading at price which is less than the strike price.

Here, total cost of share with purchasing the put option is 33.23 + 2 = 35.23 $

As at expiration the stock is trading at $24, put option will be exercised and share will be sold at $ 30.

Total profit = Selling price - Purchase cost

= 30 - 35.23

= - 5.23 (loss)

Hope it clarifies!