Question

McLovin recently bought 100 shares of AAPL for $175/share. He is worried about buying at a high point, and therefore worried about a downturn in price. What option strategy could he implement to avoid substantial losses? Assume the strategy uses an at-the-money option with a $3 premium. What is his net profit (accounting for premium paid) if AAPL ends up at 180? What is the most amount of money McLovin can lose when taking this strategy? Please show your work.

Answer 1

1. Mc Lovin is already holding the shares and he is worried that the price is going to fall. to protect against falling price the option recommended is Put Option which gives holder right to sell at strike price.

2. At the money means strike price is equal to spot price = $175

when market value is higher than strike price then we lapse the put option and sell the stock in market at $180

Net Profit at the money put option = -$3 (Negative $3)(Premium paid)

3. the most amount of money McLovin can lose when taking this strategy is the premium paid because when future price is less than strike price put option will be exercised and the profit will be made and when future price is more than strike price put option will be lapsed and the maximum loss is premium paid

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