Question

2. A trader invests in Facebook by buying 1000 shares in June for $250 per share. She also buys 1000 put options for $5 each as insurance in case the stock drops sharply. The put options have a strike price of $250 and a maturity date of December.

What is the gain or loss if the stock price on December is:

a) $200,

b) $270,

c) $320 and

d) $370?

Answer 1

A when the price is 200.

Shares bought at 250.

Current price 200

Gain / Loss per share = 200 -250 = -50 Loss

Total Gain / Loss = -50* 1000shares = -50,000

Premium paid on purchase of PUT $5 each *1000 = 5000

Total Paid = 250*1000 + 5000 = 255,000

Profit from PUT = 250-200 = 50 *1000 = 50,000

Overall Gain /Loss = -50,000 +50,000 -5000 = -5000 Loss

b

CASE II when price is 270.

Shares bought at 250.

Current price 270

Gain / Loss per share = 270-250 = 20 Gain

Total Gain / Loss = 20* 1000shares = 20,000 gain

Premium paid on purchase of PUT $5 each *1000 = 5000

Total Paid = 250*1000 + 5000 = 255,000

Overall Gain /Loss = 20,000 -5000 = 15,000 gain

c

CASE III when price is 320

Shares bought at 250.

Current price 320

Gain / Loss per share = 320-250 = 70Gain

Total Gain / Loss =70* 1000shares = 70,000 gain

Premium paid on purchase of PUT $5 each *1000 = 5000

Total Paid = 250*1000 + 5000 = 255,000

Overall Gain /Loss = 70,000 -5000 = 65,000 GAIN

d

Case iv When price is 370

Shares bought at 250.

Current price 370

Gain / Loss per share =370-250 = 120 Loss

Total Gain / Loss = 120* 1000shares =120000

Premium paid on purchase of PUT $5 each *1000 = 5000

Total Paid = 250*1000 + 5000 = 255,000

Overall Gain /Loss = 120000-5000 = 115000 gain

Thanks