Suppose you own a put option that gives you the right to sell 200 shares of MMM
Question:
Suppose you own a put option that gives you the right to sell 200 shares of MMM Construction to another investor for $25 per share anytime during the next six months. MMM’s stock currently sells for $26 per share.
a. Should you exercise the option and sell the stock to the option writer (seller) if the stock price stays at $26 per share?
b. Should you exercise the option if the stock’s price increases to $30? What would be your gain (loss) if you bought the stock at $30 and then exercised the option?
c. Should you exercise the option if the stock’s price decreases to $20? What would be your gain (loss) if you bought the stock at $20 and then exercised the option?
Step by Step Answer:
a If the stock is purchased for 26 per share and sol...View the full answer
Related Video
Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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