(b)

An investor believes that shares in Oakmont plc are currently overpriced at 20 and that they will trade significantly lower in six months. The premium on a six month Oakmon option with an exercise price of 21 is currently 3.

1. Indicate the option strategy the investor would employ to take advantage of any share price decrease.

2. Calculate the profit/(loss) that would accrue from such a strategy if the Oakmont share price after six months was : (a) 12

(b) 27

Supplement your answer with appropriate payoff diagrams.