A "Put" Option Example

Posted by Brendan Flaherty

Jun 3, 2016 10:49:41 AM

Assume that a stock is currently selling for FMV of $50, and you purchase a put for $2 with a $40 exercise price that expires in three months.

  1. If the stock does not move from the $50 FMV, the purchaser of the put will have lost $2.
  2. The break-even for the purchase of the put is $38 ($40 exercise price – $2 put option cost).
  3. A dollar-for-dollar gain is received when the price is less than the $38 break-even point.
  4. If at expiration the stock is at $25, the net gain is $13 ($40 exercise price – $2 cost of put option – $25 current FMV of the stock).

Topics: Course 3: Investment Planning