A) If you buy one contract of the Nov 12 th , 2013 GE put option with a strike o

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 ****

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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