Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share.If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?

Question

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The put option will be exercised only if the final price is below the strike price.If the final price exceeds the strike price, there will simply be a loss equal to the cost of the option. 11ea1b84_8ba7_6daa_a54a_7b9e323b3c09_TB3581_00 
Profit per share = Strike price - Final price = $85 - $60 or zero: $25.00
Total profit = Profit/option ×No.of options - Cost of options = $19.90

Suppose You Believe That Florio Company's Stock Price Is Going