Question
You have purchased (gone long) a Put option on IBM stock with a Strike Price (K) of $100 per share for 3 months to expiry.
You have purchased (gone long) a Put option on IBM stock with a Strike Price (K) of $100 per share for 3 months to expiry. IBM's stock price is currently trading at $110 per share. The cost of the option (premium) is $5.25 per share.
1. What is the maximum amount you can lose on this long Put position?
2. For the option premium, how much of it's $5.25 value is "intrinsic" value and how much of it is "time" value?
3. Would you exercise the put if the stock price jumps to $125 per share?
4. Would you exercise the put option if the stock price plummets to $40 per share?
5. For questions 3 and 4, what would be the Put poistion's total profit or loss for each share price sceanrio: $125, $40?
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