Answer: Net Gain $5,000
Return on Investment = 167%
Explanation:
Profits are made on Puts if the spot price (current price) is less than the exercise price. Which is why the equation is such,
Profit equation of put option = Max ( exercise price - spot price, 0) - Premium paid.
The formula shows that there is no profit if the spot price climbs higher than the Exercise price as the option will not be exercised. In other words of the spot price is higher than the Exercise price, the option will not be exercised hence $0 profit. If the Exercise price is higher though then it will be exercised and the gain will be the exercise price minus the spot price.
Using that formula his gain was,
= 97 - 89 - 3
= $5
Treasury bond futures contracts are usually sold at a minimum of 1,000 bonds so assuming Brad got 1 then his gain would be,
= 5 * 1,000
= $5,000
His return on investment would be,
= Net profit / Initial investment
Bear in mind that his Net Investment would be the premium times the number of bonds
= 1,000 * 3
= $3,000
Return on Investment = 5,000/3,000
Return on Investment = 167%
