Put option Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle Inc. The option to sell 100 shares of Carlisle at any time during the next 90 days at a strike price of $45 can be purchased for $380. The stock of Carlisle is currently selling for $46 per share. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock during the 90 days is $46, $44, $40, and $35? What effect would the price of Carlisle’s stock slowly rising from its initial $46 level to $55 at the end of 90 days have on Ed’s purchase? In light of your findings, discuss the potential risks and returns from using put options to attempt to profit from an anticipated decline in share price.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Put option Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle Inc. The option to sell 100 shares of Carlisle at any time during the next 90 days at a strike price of $45 can be purchased for $380. The stock of Carlisle is currently selling for $46 per share.

  1. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock during the 90 days is $46, $44, $40, and $35?
  2. What effect would the price of Carlisle’s stock slowly rising from its initial $46 level to $55 at the end of 90 days have on Ed’s purchase?
  3. In light of your findings, discuss the potential risks and returns from using put options to attempt to profit from an anticipated decline in share price.
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