A trader writes a December put option with a strike price of $30. The price of the
Question:
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Step by Step Answer:
The trader makes a gain ...View the full answer
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Corporate Finance questions
-
On June 25, 2012, an investor owns 100 Google shares. As indicated in Table 1.3, the bid share price is $561.32 and a December put option with a strike price $520 costs $26.10. The investor is...
-
On May 3, 2016, an investor owns 100 Google shares. As indicated in Table 1.3, the share price is about $696 and a December put option with a strike price $660 costs $38.10. The investor is comparing...
-
It is May and a trader writes a September call option with a strike price of $20. The stock price is $18, and the option price is $2. Describe the investors cash flows if the option is held until...
-
3. Show how accounts receivable will appear on the December 31, 2023, balance sheet. Assets Current assets: Partial Balance Sheet Accounts receivable Less: Allowance for doubtful accounts 22,525
-
How are leases classified for tax purposes? MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current...
-
Determine the intervals on which the function is (a) Increasing, (b) Decreasing, and (c) Constant X T V
-
A vibrometer has an undamped natural frequency of \(10 \mathrm{~Hz}\) and a damped natural frequency of \(8 \mathrm{~Hz}\). Find the lowest frequency in the range to infinity at which the amplitude...
-
On January 1, 2014, O'Brien Company issued a $210,000, six-year, 9% installment note to Bulldog Bank. The note requires annual payments of $46,813, beginning on December 31, 2014. Journalize the...
-
Frey Company, a shoe manufacturer, has the opportunity to receive the following mixed income of cash flows over the next five years: Year-End Cash Flow 1 $400.00 2 $800.00 3 $500.00 4 $400.00 5...
-
Can you use movie critics opinions to forecast box office receipts on the opening weekend? The following data, stored in Tomatometer , indicate the Tomatometer rating, the percentage of professional...
-
Suppose that a June put option to sell a share for $60 costs $4 and is held until June. Under what circumstances will the seller of the option (i.e., the party with a short position) make a profit?...
-
Explain carefully the difference between hedging, speculation, and arbitrage.
-
A firm has assets of $1,800,000 and turns over its assets 2.5 times per year. Return on assets is 20 percent. What is its profit margin (return on sales)?
-
John Wood, Inc. has recently issued zero-coupon bonds at a par value of $1,000. The aforementioned bond possesses an 8-year term to maturity, alongside a semi-annual compounded yield to maturity of...
-
In late 2 0 X 1 , Smart Co . recorded $ 1 0 , 0 0 0 salary of lab technicians who spent 6 0 % of their time in Smart's own R&D projects and 4 0 % of their time in R&D projects that Smart performed...
-
Watch the following documentary: We're Not Broke https://www.youtube.com/watch?v=TPHlhzRSEnw Reflection essay should be in this format: Summary of the documentary Discussion of the documentary Impact...
-
ABC is a company that specializes in designing, manufacturing, installation of air conditioning systems. Nationwide Retailers owns several retail shops across the country. Nationwide engaged ABC to...
-
Explain why academic integrity should matter to dual enrollment students.
-
An analysis of transactions for Kang & Co. was presented in E1.8. Instructions Prepare an income statement and a retained earnings statement for August and a statement of financial position at August...
-
What are the four types of poultry production systems? Explain each type.
-
Explain carefully the distinction between real-world and risk-neutral default probabilities. Which is higher? A bank enters into a credit derivative where it agrees to pay $100 at the end of one year...
-
Explain carefully the distinction between real-world and risk-neutral default probabilities. Which is higher? A bank enters into a credit derivative where it agrees to pay $100 at the end of one year...
-
Suppose that a bank has a total of $10 million of small exposures of a certain type. The one-year probability of default is 1% and the recovery rate averages 40%. Estimate the 99.5% one-year credit...
-
During Year 1, Chung Corporation earned $6,900 of cash revenue and accrued $3,800 of salaries expense. Required: (Hint. Record the events in general ledger accounts under an accounting equation...
-
Prepare Cash Budget from Budgeted Transactions Prepare a cash budget for the month ended May 31, 2019. Campton Company anticipates a cash balance of $89,000 on May 1, 2019. The following budgeted...
-
The monthly salaries for December and the year-to-date earnings of the employees of Bush Consulting Company as of November 30 follow. Determine the amount of Medicare tax to be withheld from each...
Study smarter with the SolutionInn App