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Put Option of Investors

An investor buys a stock for $36. At the same time a 6 month put option to sell the stock for $35 is selling for $2.

a) What is the profit or loss from purchasing the stock if the price of the stock is $30? $35? $40?

b) If the investor also purchases the put (ie. Construct a protective put), what is the combined cash outflow?

c) If the investor constructs the protective put, what is the profit or loss if the price of the stock is $30? $35? Or $40 at the put's expiration?
At what price of the stock does the investor break even?

d) What is the maximum potential loss and maximum potential profit from this protective put?

e) If, after 6 months, the price of stock is $37, what is the investor's maximum possible loss?

Solution Preview

a.
at 30, investor will lose 6 dollars since he bought it at $36
at 35, investor will lose 1 dollar since he bought it at $36
at 40, investor will make 4 dollars since he bought it at $36

b. the combined cash outflow = 36+2= $38

c.
at 30 = lost $6 ...

Solution Summary

The profit or loss from purchasing the stock of prices are determined. The maximum potential loss of profits is determined.

$2.19