Black-Scholes demonstrates that the value of a put option increases the longer the time to expiration. Currently the price of a stock is $100 and there are two put options to sell the stock at $100. The three-month option sells for $7.00 and the six-month option sells for $4.50.

a) What would you do and why?

b) How much do you earn or lose after three months at the following prices of the underlying stock ($85, $90, $95, $100, $105, and $110)? Assume the worst-case scenario.

c) Is there any reason to anticipate earning a higher return than your answers in (b)?

Various option strategies (e.g., the straddle) were explained in this chapter. The following problems apply these strategies.