You own 300 shares of Delta stock, which is currently worth $42 a share. You just paid an option premium of $.70 to buy 3 put contracts on this stock with a strike price of $40. What is the maximum loss per share you are avoiding by purchasing the option contract?
A)$40.00
B)$42.85
C)$44.15
D)$47.00
E)$53.85

Question

Quizplus · Accepted Answer

The maximum loss per share you are avoiding by purchasing the option contract is the difference between the current stock price ($42) and the strike price ($40), which is $2. However, since you paid a premium of $.70 per share for the option, the maximum loss avoided is actually $2 - $.70 = $1.30 per share. The choices provided do not directly match this calculation, suggesting a misunderstanding of the question's intent. Given the options, the closest interpretation would be to consider the maximum loss avoided as the total loss you could face without the option, which would be the entire value of the stock at $42 per share. However, this interpretation does not align with standard financial calculations for options. The correct approach to calculate the maximum loss avoided involves considering the cost of the premium and the difference between the stock price and the strike price, which was not accurately reflected in the provided choices.

You Own 300 Shares of Delta Stock, Which Is Currently