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A Put Exists with the Option to Sell a Stock

question 21

Essay

A put exists with the option to sell a stock at $35. The price of the stock is $34, and the price of the put is $2.

a. What is the intrinsic value of the put?

b. What is the time premium paid for the put?

c. What is the percentage return from purchasing the put if, at the expiration of the put, the price of the stock is $31?


Definitions:

Incremental Annual Revenues

The additional revenue generated from a specific action or decision, measured on an annual basis.

Scrap Value

The estimated resale value of an asset at the end of its useful life, typically associated with machinery, equipment, or vehicles.

Payback Period

The length of time required to recover the cost of an investment or project from its cash flows.

Initial Investment

The initial amount of money invested in a project or startup business.

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