Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of
A) $200.
B) $240.
C) $2,640.
D) $3,000.

Question

Quizplus · Accepted Answer

Steve's initial investment in the stock was 300 shares at $20 per share, totaling $6,000. When the stock price increased to $33, his stock value was $9,900. However, he hedged with 3 puts at $120 each, costing $360. The puts allow him to sell his shares at $30 each, but since the stock price was $22, he didn't exercise them. Instead, he sold his shares at $22 each, totaling $6,600. His net profit is the final sale amount ($6,600) plus the value of the puts (which were not exercised, so no additional value from them) minus his initial investment ($6,000) and the cost of the puts ($360), which equals $6,600 - $6,000 - $360 = $240. However, considering the calculation mistake in the explanation, the correct calculation should be based on the actual stock sale price and the cost of puts without considering the exercise of puts, as they were not beneficial to exercise. The correct profit calculation should consider the increase in stock value from the purchase price to the selling price and subtract the cost of the puts.

Steve Bought 300 Shares of Stock at a Price of $20