Question

You set up a “Protective Put” position on a stock-index currently priced at $54.50, using the following put option: [P(S0=$54.50, T=3 months, X=50)] that has a current price of $0.50 in the market. Scale the transactions by one option contract. There are four parts to this answer, a) to d).  (Show calculations that you performed to get the final answer, in order to earn more partial credit, in the event that you miss the final answer.)

a) What are your holdings for this “Protective Put” position?

b)  Assume you hold the position to option expiration. What is your breakeven terminal stock price then?

c)  Assume you hold the position to option expiration. What is your minimum profit (or, equivalently, maximum loss) in dollars?

d) Assume that you set up this position at time zero, and hold it to option expiration. What is the worst possible `percentage return' that you could realize over this period, from this protective put position?

Answer 1