Question

You want project your investment so you bought a stock at 100 and the strike price is 100 dollar you paid 3 dollars as premium Show the max loss, max profit protective put , break even

If price now 95 what is your profit

And plot it on a diagram

Answer 1

Protective Put strategy-

An investor who has purchased a share, purchase a put option to get a right to sell the share at a fixed price in future and thus to protect himself from the risk of fall in prices.

Strategy under Protective Put-

Purchase a put option at aa strike price equals to the current market price.

Cost of the strategy = Premium paid = $3

BEP or breakeven price = Strike price - Cost of strategy = $100+$3 = $103

Maximum Profit is Unlimited.

Maximum loss is = Cost of starategy = $3

If price now $95 , then you will exercise your long put option and will sell the share at $100 as per the put option.

You had paid $100 to buy the share

You will get $100 by selling the share

You have already paid $3 as premium

hence profit/(loss) = $100-$100-$3 = -$3 [maximum loss]

P1	S	.	P0	.	Higher of Price on maturity or Put option strike	Selling price-Purchase price-Premium paid
price on maturity	PUT OPTION Strike price	Exercise PUT option	Purchase price	Premium paid	Selling price on maturity	Profit/loss
91	100	yes	100	3	100	-3
93	100	yes	100	3	100	-3
95	100	yes	100	3	100	-3
97	100	yes	100	3	100	-3
99	100	yes	100	3	100	-3
101	100	NO	100	3	101	-2
103	100	NO	100	3	103	0
105	100	NO	100	3	105	2
107	100	NO	100	3	107	4
109	100	NO	100	3	109	6
111	100	NO	100	3	111	8
113	100	NO	100	3	113	10
115	100	NO	100	3	115	12