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 be your pre-tax net profit?

Question

Quizplus · Accepted Answer

If you bought the put option for $510.25 and Delva's stock price dropped to $60, you could exercise the option to sell 100 shares at the strike price of $85. This means you would make $85 - $60 = $25 per share. For 100 shares, this equals $2,500. Subtracting the cost of the option, $510.25, from this amount gives a pre-tax net profit of $2,500 - $510.25 = $1,989.75.

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