A) If you buy one contract of the Nov 12 th , 2013 GE put option with a strike o
ID: 2384502 • Letter: A
Question
A) If you buy one contract of the Nov 12th, 2013 GE put option with a strike of $21, what are your profits and rate of return if GE share price drops to $18 at expiration (assuming nothing happens before that)?
B) Some option premiums are missing in the above table, which one of the followings can be true?
A. P1=0.58 and P2=0.42
B. P1=0.58 and P2=1.04
C. P1=0.25 and P2=0.42
D. P1=0.25 and P2=1.04
*** Please Show All Work ****
Expiration Strike Put Premium Nov. 12th, 2013 21 0.37 Dec. 12th, 2013 21 P1? Dec. 12th, 2013 22 P2?Explanation / Answer
Under put option, put option buyer has the option to sell at the strike price at a specified price.
Since, share price dropped to $18 and strike price is $21, buyer of put option will exercise contract.
Profit = $21-$18-$0.37 = $2.63
Rate of return = $2.63÷$0.37 = 710.8%
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