American Put Option question from Mock following, question, contract, position

canadiananalyst

Can anyone help me out with this question? Give your solutions below and I will tell you what the answer is in a bit. Its seems fairly a straightforward question but for some reason I’m having difficulties deriving the answer. Thanks in advance everyone
3 moths ago, Jen Baker, purchased one American put option contract on Mechor Corporation for $4 per option shares. Baker also own 100 shares of Mechor. The following data applies to Baker’s position:
Option strike price - $60
Stock price on date of option purchase - $60
Stock price today - $52
Time to option expiry from today - 1 month
Given only the above data, if Baker exercises her option today, the profit/loss (from the date of the option purchase) on Baker’s combined stock/put option is:
A) -$800
B) -$400
C) $800

lc26mizzou

I’m thinking b) -400.  She lost $800 in the value of the underlying stock ($60 at P0, $52 today), but then made that value back via the option, netting zero.  After accounting for the premium of $4, she ends up losing $400?

marsilni

The Answer is B ) -400.
The key here is “ the profit/loss (from the date of the option purchase)”. Therefore since she purchased the option when shares were $60, and she then sold at $60 (X-price), therefore the loss is the $4 per contract.
The thing I hate about the questions I have came across, is many are like this, they seem like “Gotcha” questions.

lc26mizzou

so here what threw me off….
because she has a put option, she has the obligation of selling her 100 shares at $60 each for a total of $6000 when the price drop down to $52/shs. She can use the $6000 she gets for exercising her option to buy back shares at the lower price today, which is $52/shs….for a total of $5200 and therefore netting a gain of $800 ($6000 received - $5200 paid for new shares = $800)….after paying off the $400 ($4/per put option premium) she should have a total profit of $400?

dontknow1987

she purchased a put option so she can sell shares for $60 each
long put - She has the right to sell shares,  not the obligation

soddy1979

Her cpk, could elaborate on your method above?
This is how i made sense of this, let me know what you think:
So since its a protective PUT…she owns the shares and she buys a put at $4/shs = $400
when prices drop to $52…she exercises her put and sells them at $6000 at the end she only lost $400 for paying for the premium

Benjiko

owns the share = is a sunk cost of 60$.
you buy a put = so spend 4 $
so at time 0 - for each share position you have spent 64$

tikfed

in her long position, she bought at 60 and it’s now 52, so she lost 8/sh there. -8
her  buying the put was at 60 and it’s now, 52, so she gains 8/sh here. +8
-4  for put option. -4*100=-400
the question should clarify that she sold her long position today too.

Unforseen

She did sell her long position. It happened when she exercised the put option. She sold her stocks for $60 each.