Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?

Question

Quizplus · Accepted Answer

The pre-tax net profit is calculated by taking the difference between the strike price ($85) and the stock price at exercise ($60), which equals $25. Then, subtract the cost of the option ($5.10) from this amount. So, $25 - $5.10 = $19.90.

Suppose You Believe That Florio Company's Stock Price Is Going