Question

Three months ago, Central Supply stock was selling for $51.40 a share. At that time, you purchased five put options on the stock with a strike price of $52 per share and an option price of $0.60 per share. The option expires today when the value of the stock is $42.70 per share. What is your net profit or loss on this investment? Ignore trading costs and taxes.

A. $4.350
B. $4.650
C -$300
D. -$1.300
E. -$1.000

Answer 1

The net profit or loss on this investment is -$48.00.

Step-by-step explanation:

To calculate the net profit or loss on the investment, you need to consider the cost of the put options and the difference between the strike price and the current stock price.

Step 1: Calculate the cost of the put options by multiplying the number of options (5) by the option price ($0.60 per share). The total cost of the put options is $3.00.

Step 2: Calculate the profit or loss on the stock by subtracting the current stock price ($42.70 per share) from the strike price ($52 per share) and multiplying the result by the number of options (5). The total profit or loss on the stock is -$45.00.

Step 3: Calculate the net profit or loss by subtracting the cost of the put options ($3.00) from the profit or loss on the stock (-$45.00). The net profit or loss on this investment is -$48.00.