Question

Dorothy buys a Put option on S&P 100 index for $5.25 at an exercise price of 675. The current value of S&P 100 index is 700. What would be her Holding period return if the S&P 100 index goes down to 665 by the date of expiration?

Answer 1

Calculation of holding period return;

 

Profit of put option = Exercise price - Price at expiration - Option premium  

Profit of put option = 675 - 665 - 5.25

Profit of put option = $4.75

 

 

Holding period return = Profit of put option / Option premium * 100

Holding period return = $4.75 / $5.25 * 100

Holding period return = 90.48% (Approx.)

Holding period return = 90.48% (Approx.)