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Today’s share price of Apple is $120
Today’s share price of Apple is $120. You think Apple’s stock will fall over the next 3 months.
Today you observe the following option prices (all expiring in 3 months):
Option 1: Put Option Premium = $4; with a Strike Price = $110
Option 2: Put Option Premium = $2; with a Strike Price = $100
Today you buy Option 1 and sell Option 2; (i.e. bear put spread). At expiration the stock price equals $106. What is your profit or loss (on a per share basis)?
A) A loss of $4
B) A loss of $2
C) A profit of $2 D) A profit of $4 E) A profit of $6
Expert Solution
The profit or loss in case of option 1 is computed as follows:
= Strike price - Price at expiration - Premium
= $ 110 - $ 106 - $ 4
= $ 0
The profit or loss in case of option 2 is computed as follows:
= Strike price - Price at expiration - Premium
= $ 100 - $ 106 - $ 2
= - $ 8
Maximum loss in case of put option is restricted to the amount of premium. So, the loss will be:
= - $ 2
Therefore the total gain or loss will be:
= $ 0 - $ 2
= - $ 2
So, the correct answer is option B.
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