FRM Part I · FRM Exam Part I · Properties of Options
An investor holds a long position in one share of a stock and buys a European put with a strike of $60 for $2.50. The stock was bought at $58. What is the investor's minimum net profit or loss per share at expiration?
The minimum outcome is a loss of $0.50 per share. The put guarantees the holding is worth at least $60, while the total cost was $58 for the stock plus $2.50 for the put, or $60.50. Therefore the worst case is 60 minus 60.50.
- ALoss of $0.50Correct
- BLoss of $2.50
- CLoss of $4.50
- DProfit of $1.50
Explanation
With the put, the position is worth at least $60 at expiration. Total cost is 58 + 2.50 = $60.50. The minimum result is 60 - 60.50 = -$0.50, a loss of $0.50. A loss of $4.50 ignores that the put locks in a $60 floor value.
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