Question 8

In January 2021, Apple shares are priced at $320 a share. You believe that they are considerably overvalued and are worth only $200 a share. June 2021 put options on a strike price of $250 a share are currently valued at $10 per share. Each put contract is based on 100 shares.

(i) What is the intrinsic value of the put option per share?

(ii) What is the time value of the put option per share?

(iii) If we arrive at expiry in June and you are proved correct with Apple shares are selling for $200, what is your net dollar profit on a single put option contract in dollars bearing in mind the contract is based on 100 shares?

(iv) What is your net dollar profit (+) or loss (-) as a holder of the put contract (based on a contract size of 100 shares) if we arrive at expiry in June and you are wrong and Apple shares are selling for $270?

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Put option gives right to its buyer to sell underlying at specified price in future. Thus put option will be exercised if price as at expiry is less than the strike price. Hence for seller of put it becomes obligation to buy underlying when buyer enforceses his right. To Buy put option one has to pay premium and hence seller receives the premium i) Intrinsic value in case of put option = Strike price - Market price per share  Here strike price = $ 250 and market price of stock = $ 320 . Since strike price is less than market price , intrinsic value is 0   ii) Time val ... See the full answer