You believe that oil prices will be rising more than expected, and that rising p

Question

You believe that oil prices will be rising more than expected, and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their operations. You also believe that the effects on this sector will be magnified because consumer demand will fall as oil prices rise. You locate an exchange traded fund, XLB, that represents a basket of industrial companies. You don't want to short the ETF because you don't have enough margin in your account. XLB is currently trading at $22.75. You decide to buy a put option (for 100 shares) with a strike price of $23.90, priced at $1.26. It turns out that you are correct. At expiration, XLB is trading at $20.15. Calculate your profit. (Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet.) Calls Puts Strike Expiration Price Strike Expiration Price S20.15 November S0.23 S20.23 S20.15 November S1.62 S23.90 November S1.26 The profit of the trade before trading costs is s.(Round to the nearest cent.)

Explanation / Answer

profit=strike - expiry- premium paid=(23.90-20.15-1.26)*100=249

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