4. Mr. Madoff wrote (sold) a put option on Google stock with strike price $480 per...

4. Mr. Madoff wrote (sold) a put option on Google stock with strike price $480 per share and received the premium of $2.25. Answer the following question and always think about who will decide whether to strike or not to strike.

1) Suppose Google stock price is $460 before option expiration date. What would be Mr. Madoff’s profit/loss?

2) Suppose Google stock price is $490 before option expiration date. What would be Mr. Madoff’s profit/loss?

3) At what stock price will Mr. Madoff breakeven?

4) Draw the relationship between Mr. Madoff’s profit/loss and Google stock price by changing stock price from $470 to $490.

Solutions

Expert Solution

1. as the Strike price is higher than market Price the put option will be exercised by holder.

Mr. Madoff’s loss = Strike Price - Market Price - Premium received

Mr. Madoff’s loss = $480 - $460 - 2.25

Mr. Madoff’s loss = $17.75

2. As the Strike price is Less than market Price the put option will be lapsed by holder.

Mr. Madoff’s Profit = Premium Received= $2.25

3. the Price of Break Even = Strike Price - Premium received = $480 - 2.25 = $477.75

Please dont forget to upvote

jeff jeffy answered 1 year ago

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