Suppose you have $50,000 to invest. You’re considering Miller-Moore Equine Enter

Question

Suppose you have $50,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $20 per share. You notice that a put option with a $20 strike is available with a premium of $2.5. Calculate your percentage return on the put option for the six-month holding period if the stock price declines to $16 per share. (Negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your 6-month return as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Strike Price = $20

Stock Price = $16

Gain = $20 - $16 = $4

Premium Paid = $2.5

Net Gain = $4- $2.5 = $1.5 per option

Total Options that can be purchased = 50,000 / 2.5 = 20,000 put options

Total Gain = 1.5 x 20,000 = $30,000

Percentage Return = 30,000 / 50,000 x 100 = 60%

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