Problem

Mr. ‘A’ is bearish on the stock of ‘B’ corporation. Therefore he purchase 5 put option contracts on ‘B’ corporation for a premium of $3. The exercise price is $41 and it has a maturity period of 3 months. The current market price of the stock is $40 . If Mr. ’A’ is correct and ‘B’s price fall to $30, how much profit will he earn over 3 months period?

Solution:

Since the exercise price is $30 and the exercise price is $41, his profit is $11. As he paid $3 in premium, the net profit will be $8.