Question

You bought 500 shares of GNX Ltd for $98.00 per share in May 2020. You are now worried about the market turning bearish, so you decide to buy 5 put options on the company's shares with each contract written on 100 shares at an exercise (or strike) price of $100.00 expiring in August 2020 for a premium of $3.00 per share. If at expiration the company's share price is $80.00 calculate the total profit or loss on your hedged position. Show all calculations.

Answer 1

Bought 500 shares of GNX Ltd for $98.00 per share in May 2020.

at expiration, the company's share price is $80.00

Loss from Hoslding the Share = Quantiry * ( Closing Price - Purchase Price)

                                           = 500 * ( 80 - 98)   = - 9000.00

No of Put Option Purchased   Q = 05

Lot Size ( No of Share in each Option) L = 100

Put Premium for Each share p = 3

Total Premium paid = Q * L * P = 05 * 100 * 03 = $ 1500.00

Now Put Strike Price X= 100

at expiration the company's share price is $80.00 E = 80

Since expiration price is lower than Strike price He will gain from the Put Option.

Gain from Put Option= Q * L * ( X -E) = 05 * 100 * ( 100 - 80) = 10,000

Total Gain from the position =

Loss from Hoslding Share +Gain from Put Option - Put Premium Paid

= - 9000.00 + 10,000 - 1,500

= - 500.00

Ans: the total loss on your hedged position = $ 500.00