ken the options manager bought 100 shares of xyz stock at 37 per share. At the s

Question

ken the options manager bought 100 shares of xyz stock at 37 per share. At the same time he bought one put option for a market price of 5 per option. The exercise (strike) price for these options is $40. Assume that ken maintains these positions until the expiration date of these options. The expiration date is in 1 month as a function of the stock price at the expiration date.

Question is to construct a table in this order to show what will happen: create a table using the 4 categories given below in the same order.

   Stock Price/ stock profit / put profit / net profit.

Why is my net profit zero when the stock price is $42?

Why does the put profit (-4) when stock price is at $39?

Why does the put profit remain (-5) starting at $40?

Explanation / Answer

1) If strike price is 42: Payoff = 100*42 - 100*37 - 100*5 = 0

2) If strike price is 42: Put profit = (40 - 39) - 5 = (-) 4

3) If strike price is 40: Put profit = (40 - 40) - 5 = (-) 5

WHen market price is 40 or above, put remain worthless and will not be exercised therefore profit of put will remain same at (-) 5.

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