Question

Steve bought 300 shares of stock at a price of $20 per share. The price of the stock then went up to $33 per share so Steve decided to hedge his position by purchasing 3 puts at a cost of $120 each. The puts have an exercise price of 30. One week prior to the expiration of the puts, the price of the stock was at $22 per share. If Steve closed out all of his positions at that time, he would have earned a net profit of

Answer 1

Answer: $2640

Explanation:

The net profit that Steve would have earned would be calculated as:

Profit on shares sale = 300 × (22-20) = 300 × 2 = $600.

Add: Profit on put position = 300 × (30 - 22) = 2400

Less: Premium paid on the put option = 360

Net profit = $600 + $2400 - $360

= $2640