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

Unforseen

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

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.

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$

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

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

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?

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

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?