This morning, Kate put a European protective put strategy in place when the cost of ABC stock was $29.15 per share and the 1-year $30 ABC put was priced at $1.05 per share. How much profit per share will she earn from this strategy if the stock is worth $28 a share on the put expiration date?

Question

Quizplus · Accepted Answer

A European protective put strategy involves buying the stock and buying a put option as insurance against the stock price falling. If the stock price is $28 at expiration, the put option with a strike price of $30 allows her to sell the stock for $30, realizing a gain of $2 per share on the put. However, since she bought the stock at $29.15 and the put for $1.05, her total cost is $30.20. Selling the stock for $30 means she has a net loss of $0.20 per share.

This Morning, Kate Put a European Protective Put Strategy in Place