Question

In: Finance

A put is currently being traded on an underlying security. An investor buys a put option...

A put is currently being traded on an underlying security. An investor buys a put option for $7 per share. The strike price is $100 per share and the option expires in three months.

a) What is the profit of this trade per share if in three months the price of the

underlying security is $117 per share?

b) How does you answer to part a) change if the price of the underlying security in

three months is $99 per share?

Solutions

Expert Solution

The put Option was bought for $7. Strike price is $100.

a) If the Market price is $117, the security will be sold in market as the higher price is offered there. So, the profit shall be 17 (117-100) on sale. But, the Put option will expire unutilized. So, the net Profit shall be,

Profit = 17 - 7 = $10.

b) If the Market price is 99 and thus the put option will be exercised. So, the Profit will be 100-99 = $1. So, the put option cost $7. So,

Profit = 1-7 = $6 Loss

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

An investor buys a butterfly spread on COPCO stock by buying one put option with an...
An investor buys a butterfly spread on COPCO stock by buying one put option with an exercise price of $50 for $1, buying one put option with an exercise price of $60 for $7 and selling two put options with an exercise price of $55 for $3 each. (above relates to the 3 questions below) (Please show workings) 1. If COPCO’s expiration date stock price is $48, the investor’s profit is: (a) $5 (b) -$2 (c) $1 (d) -$7. 2....
If an investor buys a 12-month credit spread put option on XYZ Ltd.’s bond with a...
If an investor buys a 12-month credit spread put option on XYZ Ltd.’s bond with a strike spread of 150bps for a premium of 55 bps, what is the appropriate course of action if XYZ Ltd’s spread tightens to 50bps? Widens to 250bps? What is the breakeven level of trade? Illustrate your answers with the bond value movements.
If an investor buys a 12-month credit spread put option on XYZ Ltd.’s bond with a...
If an investor buys a 12-month credit spread put option on XYZ Ltd.’s bond with a strike spread of 150bps for a premium of 55 bps, what is the appropriate course of action if XYZ Ltd’s spread tightens to 50bps? Widens to 250bps? What is the breakeven level of trade? Illustrate your answers with the bond value movements.
Acme Corp. is currently trading at $52 per share. Assume the investor buys a put with...
Acme Corp. is currently trading at $52 per share. Assume the investor buys a put with a strike price of $50 for $1.08 and buys a call for $4.57 with a strike price of $50. (a) (4 pts) Draw the profit and loss diagram for this strategy (just the options) as a function of the stock price at expiration. In that graph label BOTH the maximum loss and maximum gain possible. (b) (4 pts) Both options expire in one year...
Hedging with a put option Suppose that an investor owns one share of ABC stock currently...
Hedging with a put option Suppose that an investor owns one share of ABC stock currently priced at $30. The investor is worried about the possibility of a drop in share price over the next three months and is contemplating purchasing put options to hedge this risk. The put option is having a strike of $30 and premium of $1.50. Compute the profit of a a. un-hedged position if the stock price in three months is $25 b. *un-hedged position...
A 14-year, 8% coupon, paid semiannually, option-free bond is currently traded at 109. If an investor...
A 14-year, 8% coupon, paid semiannually, option-free bond is currently traded at 109. If an investor reinvests coupon income at 6%, what is the total return of the investment? Keep four decimals, e.g., 10.1234%.
You wrote(sold short) 1 put option when the put option price was $2, the underlying stock...
You wrote(sold short) 1 put option when the put option price was $2, the underlying stock price was $50, and the delta of the put option was -0.65. To achieve delta neutrality, you shorted some shares of the underlying stock. Please fill in the blanks in the following table. Please show calculations. Week Stock price Put option price per share Delta Number of additional shares shorted Proceeds from short selling additional shares 0 50.00 2 -0.65 1 48.12 3.6 -0.80...
You are looking at a put option on the pound in which the underlying (i.e. the...
You are looking at a put option on the pound in which the underlying (i.e. the pound) is at $1.218 per pound at expiration, the options are on 10,000 pounds, the exercise price is $1.105 per pound, and the option premium was $0.02 per pound when the option was purchased. What is the profit at expiration of this option for the option holder?
Suppose that an investor is analysing one European call option on an underlying stock with the...
Suppose that an investor is analysing one European call option on an underlying stock with the following characteristics: Option price is $5, the current stock price is $95, the strike price = $100, and the expiry date of the option is in 2 months. Which of the following statements is incorrect? Select one: a. The break-even price for taking a long position in this call option is $100. b. Buying the call option will give the investor some advantages over...
A. An investor buys for $3 a put with strike price of $35 and sells for...
A. An investor buys for $3 a put with strike price of $35 and sells for $1 a put with a strike price of $30. What is this strategy called? What are the payoffs and profits if the stock price is above $35, below $30, and between $30 and $35? B. The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT