FRM Part I · FRM Exam Part I · Trading Strategies
An investor owns 200 shares of a stock trading at $40 and buys two put contracts (100 shares each) with strike $38 at a premium of $2 per share. What is the maximum loss on the protective put position, ignoring financing costs?
The maximum loss is $800. Per share, the investor can lose the $2 gap between $40 and the $38 strike plus the $2 premium, totaling $4, multiplied by 200 shares.
- A$400
- B$800
- C$1,200Correct
- D$7,600
Explanation
Worst case the stock falls below $38 and the put is exercised. Loss per share is (40-38) stock loss plus $2 premium = $4. For 200 shares, the maximum loss is $800. Wait: 4 x 200 = $800.
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