Question

You are skeptical of the prospects of a particular technology stock. Therefore, you buy four put option contracts on the stock. You pay a premium of $3 per share, and each contract involves 100shares. The option’s strike price is $40. It has a maturity of three months. The firm is currently trading at $39. If your intuition is correct, and the market price of the stock falls to $30, how much have you made?

Answer 1

Solution:
	Profit made when intuition is correct	2800
Working Notes:
	In the given case you buy 4 put option. Buyer of put option get right to sell shares at strike price, hence when share price fall, buyer put option makes money by selling share at strike price though share price is currently selling at below strike by selling shares at higher price than its current price
Notes:	Put option beneficial to buyer of put option to exercise when its expiry price is lower than contract strike price. Calculation are done based on strike price & expiry stock price.
	Profit made when intuition is correct
	= No of contracts x no of shares in a contract x (strike price - expiry stock price - premium paid)
	= 4 x 100 x (40 -30-3)
	=$2,800
Please feel free to ask if anything about above solution in comment section of the question.