Question

I need help

Suppose you own 100,000 shares of a stock selling for $20 a share. You also purchased a PUT option for each share of stock for $4 per share. Strike price (exercise price) is $20. At option expiration, the stock is selling for $15. What should you do regarding the put?

		Sell the put
		Exercise the put
		Buy more put options to offset the loss on the stock
		Let the put option expire unexercised

The transaction above is described as a protective put hedge. Calculate the hedge profit, given the total number of shares

-$100,000

-$400,000

-$500,000

$100,000

Answer 1

Put option is the right to sell a specified asset at a specified price on a future date

The option is exercised when the market price is lower than the strike price

Since the Market price on maturity is less than the strike price, the correct action is

Exercise the put

Hedge Profit = (Strike price – market price – premium paid)*Number of shares

= (20-15-4)*100,000

= $100,000

Hence, the answer is $100,000