Tom Gettback buys 100 shares of Johnson Walker stock for $87.00 per share and a three-month Johnson Walker put option with an exercise price of $105.00 for $20.00. What is Tom's dollar gain/loss if at expiration the stock is selling for $105.00 per share?
A) $1000 gain
B) $200 loss
C) $1000 loss
D) $200 gain
E) $500 gain

Question

Quizplus · Accepted Answer

DTom's initial investment includes buying 100 shares at $87.00 each, totaling $8,700, and buying a put option for $20.00, which for 100 shares totals $2,000. His total initial investment is $10,700. If the stock is selling for $105.00 per share at expiration, his shares are worth $10,500. The put option, with an exercise price of $105.00, is at-the-money and thus expires worthless. Therefore, his total value is $10,500, resulting in a $200 loss from his initial investment of $10,700. However, since the question asks for the gain/loss at expiration and does not specify including the cost of the put option in the calculation of gain/loss at expiration, one could interpret that the gain/loss calculation should be based solely on the stock's value change. In this interpretation, since the stock's value increased from $87.00 to $105.00 per share, Tom gains $18.00 per share on 100 shares, totaling a $1,800 gain. However, this interpretation does not match any of the provided options exactly, indicating a misunderstanding in the explanation process. The correct interpretation focuses on the total investment and the value at expiration, leading to a $200 loss, as the put option's cost is considered part of the investment loss when it expires worthless.

Tom Gettback Buys 100 Shares of Johnson Walker Stock for $87.00