Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be?

Question

Quizplus · Accepted Answer

The profit from exercising the put option is ($85 - $60) * 100 = $2,500. Subtract the cost of the option, $510.25, from this profit to get the net profit: $2,500 - $510.25 = $1,989.75.

Suppose You Believe That Delva Corporation's Stock Price Is Going