Gretchen Miller has been analyzing options on the common stock of Spirit Electronics Group (SEG), which last traded on the NASDAQ for $25.96. Miller has collected the following data on put options for SEG stock that expire in three months:
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StrikePut -
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22.500.25
25.000.65
27.502.00
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Miller has been asked by her supervisor to determine the profit on a protective put strategy using a strike price of $25.00 if the stock price is $27.13 on the option expiration date. What figure should Miller report to her supervisor?
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A. B. C.B
To determine the profit on a protective put strategy, we need to calculate the net payoff on the options position.
In a protective put strategy, an investor holds a long position in the underlying stock and purchases put options as insurance against a decline in the stock's price. The put option gives the holder the right, but not the obligation, to sell the stock at the strike price.
Given the data provided, the strike price for the put options is $25.00. This means that if the stock price is below $25.00 on the option expiration date, the put options will have value.
To calculate the profit, we need to consider two scenarios:
Stock price below the strike price: If the stock price is below the strike price ($25.00), the put option will be exercised, and the investor can sell the stock at the strike price. The profit from exercising the put option is the strike price minus the stock price.
In this case, the stock price on the option expiration date is $27.13, which is above the strike price. Therefore, the put option will not be exercised, and the profit from the put option is zero.
Stock price above the strike price: If the stock price is above the strike price, the put option will expire worthless, and the investor will only incur the cost of purchasing the put option.
From the given data, we can see that the cost of the put option with a strike price of $25.00 is $0.65.
Since the stock price on the option expiration date is $27.13, which is above the strike price, the put option expires worthless. Therefore, the profit from the put option is zero.
Hence, the figure Miller should report to her supervisor is A. $0.00.