Question

In September 2021 Apple shares are priced at $180 a share. You believe that they are considerably overvalued and are worth only $65 a share. June 2022 the put option premium at a strike price of $140 a share are currently priced at $4 per share. Each put contract is based on 100 shares.

(i) What is the intrinsic value of the put option per share?

(ii) What is the time value of the put option per share?

(iii) What is your net dollar profit (+) or loss (-) as a holder of the put contract (based on a contract size of 100 shares) if we arrive at expiry in June and you are wrong and Apple shares are selling for $200?

Answer 1

i)

The intrinsic value of put option is Max(Strike Price – Spot Price,0)

Intrinsic value of put option = Max(140 - 180,0) = 0

Intrinsic value of put optionper share = 0

 

ii)

Put price = Intrinsic value + Time value

Time value of put option = Put price - Intrinsic value = 4 - 0 = 4

Time value of put option per share = $4

 

iii)

Profit of holder of put option = {Max(Strike Price – Spot Price,0) - Put price}* Number of shares in contract

Profit of holder of put option = {Max(140 - 200,0) - 4}* 100

Profit of holder of put option = - $400 i.e. loss of $400

i. Intrinsic value of put optionper share = 0

ii. Time value of put option per share = $4

iii. Profit of holder of put option = - $400 i.e. loss of $400