(6) Three months ago, Jen Baker purchased one American put option contract on Me
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Question
(6) Three months ago, Jen Baker purchased one American put option contract on Mechor Corporation for $4 per option share. Baker also owns 100 shares of Mechor. The following data applies to Baker' s position: Strike price Stock price on the expiration date Stock price today Time to option expiry from today $60 60 52 l month Given only the above data, if Baker exercises her option today, the profit/loss (from the date of the option purchase) on Baker' s combined stock/put position is:Explanation / Answer
Put option = Right to sell Buyer expects= Stock price to decrease in future so that he can sell at the strike price Strike price> spot price= Profit In the money option= excerice the option Option Shares held= 100 Put option details Put option premium 4 Strike price 60 Stock price on the expiration date 60 Stock price today 52 Time to expiry from today 1 month In this case the buyer has expected the spot price of the stock to fall below 60$ so that he can sell it at 60$ to make profit If he sells today: Strike price 60 Stock price today 52 Put option premium 4 Strike price>spot price 60$ > 52$ Profit = Strike price- spot price= 8$ Because the buyer has paid a premium of $4 per unit= Profit is decreased by the amount of premium paid= 4$ Net profit per unit= Profit- Premium= 8$ -4$ = 4$ Total profit= no of units held* Net profit per unit = 100 * 4$ = 400$ Total profit = 400$
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