Jamie wrote a nine-month put on Beta stock.The strike price was $25 and the market price at the time the option was written was $24.The total price of the option contract was $150.At what market price will Jamie just break-even on this investment? Ignore transaction costs and taxes.
A)$23.50
B)$24.00
C)$25.00
D)$26.50

Question

Quizplus · Accepted Answer

To break even on this investment, Jamie must make enough profit from selling the put option to cover the cost of buying it initially. The total cost of the option contract was $150, so Jamie must make at least $150 in profit to break even.
If the market price of Beta stock falls below the strike price of $25, Jamie will make a profit equal to the difference between the strike price and the market price, multiplied by the number of shares covered by the option contract (which is not given in the question). For example, if the market price is $23, Jamie will make a profit of $2 per share.
However, Jamie also paid a price of $150 for the option contract, which must be subtracted from the profit to determine the net profit. For example, if Jamie sells the put option and makes a profit of $2 per share, but paid $150 for the option contract, the net profit would be $2 - $150 = -$148.
To break even, Jamie needs the net profit to be $0. Therefore, we can set up the equation:
Profit = (Strike Price - Market Price) x Number of Shares - Cost of Option Contract
$0 = ($25 - Market Price) x Number of Shares - $150
Solving for Market Price gives:
Market Price = $25 - $150 / Number of Shares
We don't know the number of shares covered by the option contract, but we do know that the market price at the time the option was written was $24, which is close to the strike price of $25. Therefore, the market price needed to break even must be slightly below $24, since the option is a put option and Jamie will make a profit if the market price falls below the strike price. The only answer choice that fits this criteria is A) $23.50.

Jamie Wrote a Nine-Month Put on Beta Stock