Question

Question # 3 (Mia. Marks le=2.5.2.5.5) On April 10 2016, Samuel Jackson, purchased an option to sell 2,000 shares of Apple with strike price of $4.00 per share to Exchange. Jackson paid $350 for the option that is exercisable until May 1Q, 2016. On May 10, Apple stocks were selling at $3.60. L What kind of option is iz 2 What is the optiom premium per share? WEilI Jacksem evencise the eptiom on May 10, 2016? Why or why not?

Answer 1

1. A put option gives the right to the option buyer to sell the underlying asset at the pre-determined date at the specified price (also known as the exercise price). Also, it is an obligation for Put option seller to buy the underlying asset at the exercise price (if the contract is executed). Thus, the option specified in the question is Put option.
2. The option premium per share is $ 0.175 ($350/2000 shares)
3. The strike price/ exercise price of the share is $4. Whereas, the spot price of the share on 10th May, 2016 is $3.60. Thus, the option will be exercised by the put option buyer because he will be able to sell the shares at $4 under this option, which will lead to a gain of $0.40 (calculations: $4-$3.6=$0.40) and a net gain of $0.225 per share (calculations: $0.40-$0.175=$0.225). Total gains of $450 ($0.225*2000 shares)