A put option in finance allows you to sell a share of stock at a given price in
ID: 2808383 • Letter: A
Question
A put option in finance allows you to sell a share of stock at a given price in the future. There are dilferent types of put options. A European put option alows you to sell a share of stock at a given price, called the exercise price, at a particular point in time after the purchase of the option. For example, suppose you purchase a sx-month European put option for a share of stock with an exarcise price of $26. If sx months later, the stock pripe per share is $26 or more, the option has no valua. If in shx months the stock price is lower than $26 per share, hen you can purchase he stock and immediately se i at he h gher exercise price of $26. he price per snare in six murths s $22.SJ you can purchase a share u the stock or 22.50 and hen use he put uption tu rmrned tely se the share or $26 Your profit would be the difference, $26 $22.50-$3.50 per share, less the oost of the option. If you paid $1.00 per put option, then your profit would be 53.50 $1.00 $2.50 per share. The point of purchasing a European option is to limit the risk of a decrease in theer share pro ofthe stack Suppose you purchased 2 D shares of the stock at S28 per share and 85 2x month European put o tans with an exercise price of2b Each put option costs $1 a) Using data tables, construct a model that shaws the value of he por lO with options and wi out options ar a share pr ce in six month bte een S2 and 29 per share n ncr ments of $1.00. what is the benefit of the put c tians on the or nlio a u or the difterent share prices? For subtractive or negative numbers use a minus sign even if there is a sign before the blank. (Example: -300). If you answer is zero, enter 0 Share Price enefit of Options (b) Discuss tha valun of the partfolia with and without the Europeanut optins. The lower the stock price, the Select your answer berieidial Uhe put options. The opions are worthi nothing at a stock price of sor Select your anserThere is a beneit ram Uhe put options to Ue aver all purtflio for stock prices or s or Select your answer-.There is a benelit from the put options to the overall portfolio for stock prices of s or Select your answerExplanation / Answer
Since the put option has a strike price of $28 and there are 85 put options bought, the following table shows the benefits of the put option for various share price of the stock after 6 months of purchase of put options
Benefits of Put option
(including option cost)
b) The lower the stock price, the more beneficial the put option. The options are worth nothing at the stock price of $29 and above. There is a benefit from the put options to the overall portfolio for stock prices of $27 or below.
Share PriceBenefits of Put option
(including option cost)
Valu of portfolio without option Value of portfolio with option $20 85(29-20) - 85*1 = $680 20*200 = $4000 680 + 4000 = $4680 $21 85(29-21) -85*1 = $595 21*200 = $4200 595 + 4200 = $ 4795 $22 85(29-22) - 85*1 = $510 22*200 = $4400 510 + 4400 = $ 4910 $23 85(29-23) - 85*1 = $425 23*200 = $4600 425 + 4600 = $ 5025 $24 85(29-24) -85*1 = $340 24*200 = $4800 340 + 4800 = $5140 $25 85(29-25) - 85*1 = $255 25*200 = $5000 255 + 5000 = $5255 $26 85(29-26) - 85*1 = $170 26*200 = $5200 170 + 5200 = $5370 $27 85(29-27) -85*1 = $85 27*200 = $5400 85 + 5400 = $5485 $28 85(29-28) -85*1 = $0 28*200 = $5600 0 + 5600 = $5600 $29 -85*1 = -$85 29*200 = $5800 -85 + 5800 = $5715