Question

Assume you purchased the right to sell 2,300 shares of JCPenney stock in November 2015 at a strike price of $9.00 per share. Suppose the stock sells for $8.00 per share immediately before your options’ expiration. What is the rate of return on your investment? What is your rate of return if the stock sells for $10.00 per share? Assume your holding period for this investment is exactly three months

Answer 1

Answer:

Put options give the holder the right to sell the underlying stock to the seller of the put option.

Put options are advantageous when the price in the market falls below the strike price of the option because the buyer will be able to sell at above market value and make a profit.

The asking price for a strike price of $9.00 is listed to be $0.33 and this is the premium paid by the buyer of the Put Option.

1. Return if stock sells for $8.00

= Amount received/ Amount spent

= (No. of shares * ((Strike price - Market price) - Premium paid) ) / (No. of share * premium)

= (2,300 shares * (($9.00 - 8.00) - 0.33))/ ( 2,300 * 0.33)

= 2.03

= 203 %

2. Return if stock sells for $10.00.

As this is an option, the investor can decide not to sell to the seller. The market price is higher than the strike price so they will not sell to the seller of the option and the return will be;

= (No. of shares * - Premium paid) ) / (No. of share * premium)

= (2,300 shares * - 0.33)/ ( 2,300 * 0.33)

= -1

= -100 %