P4 kaplan book page # 608 — OpenTuition Forums

SSaline13y ago

Shares with Put options:
Adverse Exercise* Favourable Abandon
Share price movement -$600,000 $800,000
Profits on options* $400,000
Less Premium -$34,000 -$34,000

Net -$234,000 $766,000

The hedge would save $336,000 ($600,000 - $234,000) if the share price fell, and would lose $34,000 if the share price increased i.e. the cost of the options that were not exercised.

Can you please explain what is the above extract trying to explain.

Thanks

John MoffatTutor13y ago#1

Put options give you the right to sell at a fixed price.
But you do not have to use/exercise the option.

If the share price falls, you use the option and sell at the fixed price (which saves you money because you do not lose as much).
If the share price increases then you do not use the option - you get the full benefit of the price going up. But, you still have to pay the premium for the option whether or not you end up using it.