Question

A put option in finance allows you to sell a share of stock at a given price in the future. 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 a six-month European put option for a share of stock with an exercise price of $26. If six months later, the stock price per share is $26 or more, the option has no value. If in six months the stock price is lower than $26 per share, then you can purchase the stock and immediately sell it at the higher exercise price of $26. If the price per share in six months is $22.50, you can purchase a share of the stock for $22.50 and then use the put option to immediately sell the share for $26. Your profit would be the difference, $26 − $22.50 = $3.50 per share, less the cost of the option. If you paid $1.00 per put option, then your profit would be $3.50 − $1.00 = $2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in the per-share price of the stock. Suppose you purchased 200 shares of the stock at $28 per share and 90 six-month European put options with an exercise price of $26. Each put option costs $1.

(a)	Using data tables, construct a model that shows the value of the portfolio with options and without options for a share price in six months between $20 and $29 per share in increments of $1.00. What is the benefit of the put options on the portfolio value for the different share prices? For subtractive or negative numbers use a minus sign even if there is a + sign before the blank (Example: -300). If you answer is zero, enter “0”.
	Share Price Benefit of Options $20 $ $21 $ $22 $ $23 $ $24 $ $25 $ $26 $ $27 $ $28 $ $29 $
(b)	Discuss the value of the portfolio with and without the European put options.
	The lower the stock price, the - Select your answer -morelessItem 11  beneficial the put options. The options are worth nothing at a stock price of $  or - Select your answer -higherlowerItem 13 . There is a benefit from the put options to the overall portfolio for stock prices of $  or - Select your answer -higherlowerItem 15 .

Answer 1

B). A protective put keeps downside losses limited while preserving unlimited potential gains to the upside. However, the strategy involves being long the underlying stock. If the stock keeps rising, the long stock position benefits and the bought put option is not needed and will expire worthlessly. All that will be lost is the premium paid to buy the put option. In this scenario where the original put expired, the investor will buy another protective put, again protecting his holdings.

For example, here at stock price $20 if we oy had our stock, we would end up at $4000 but with put in our portfolio we are at $6250.

Option are nothing as stock is bull run.i.e. when stock price is at $29 or more.

There is a benefit from the put options to the overall portfolio for stock prices is at the money or near in the money.