Question

Suppose you believe that Du Pont's stock price is going to decline from its current level of $ 83.30 sometime during the next 5 months. For $ 412.33 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $ 76 per share. If you bought a 100-share contract for $ 412.33 and Du Pont's stock price actually changed to $ 82.09 at the end of five months, your net profit (or loss) after behaving rationally on the decision to exercise the option would be ______?

Answer 1

A loss of $1021.33

Step-by-step explanation:

The first step is to calculate the net profit.

The profit = The current stock price - drop in stock price

$76- $82.09 = -6.09

Profit / loss = -6.09

The second step is to calculate the total gross profit

The total gross profit/loss = Outstanding shares * Profit

100 shares * - 6.09 = -$609

The total gross profit = -$609

Therefore the Net profit or loss

Net profit=Total gross profit -Contract price

= -609- 412.33

= -1021.33 (loss)

A the end of five months, your net profit (or loss) after behaving rationally on the decision to exercise the option would be a loss -$1021.33