If ABC stock is trading at $5 and I buy the Jan 15 strike put for $8.25, what happens to the value of this put at expiration if ABC only meandered between $5 to $7 during the entire period?
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2What is the strike of the put? $8.25 is quite expensive for a put price, is this supposed to be the strike price? – Victor Oct 19 '14 at 20:17
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I think he means the $15 strike. – JTP - Apologise to Monica Oct 19 '14 at 20:49
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@JoeTaxpayer - no I think the expiry is Jan 2015. Anyway, the question as it is not very clear. – Victor Oct 19 '14 at 22:26
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not enough information without the strike price – CQM Oct 19 '14 at 22:28
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@victor - right. A $15 strike means $10 in the money for a $5 stock. He needs to spell this out, the strike he bought. – JTP - Apologise to Monica Oct 19 '14 at 23:20
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It is Jan with 15 strike. I've updated the question. – 4thSpace Oct 20 '14 at 14:22
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You do realize that a put is the opportunity to sell at that price while in contrast a call option would be to buy at that price, right? – JB King Oct 20 '14 at 18:43
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@JBKing haha I didn't even consider this possible assumption oh man. I did think it was peculiar to buy a put more expensive than the stock with so little downside left in the stock! – CQM Oct 20 '14 at 18:46
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As I noted to Victor - A $15 strike put has $10 "in the money" value what the stock is $5. It will not sell for $8.25/ – JTP - Apologise to Monica Oct 20 '14 at 20:27
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@JoeTaxpayer If this is a European put, it theoretically could trade for $8.25 depending on the local interest rate. – ch-pub Oct 25 '14 at 00:29
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@4thSpace - can you add your country as a tag ? – JTP - Apologise to Monica Oct 25 '14 at 01:06
2 Answers
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The value at expiration does not depend on the price path for a plain vanilla European or American option. At expiration, the value would simply be:
max[K - S_T, 0],
where: K is the strike price,
and S_T is the underlying price at expiration.
ch-pub
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$15 - $5 = $10
How did you possibly buy a put for less than the intrinsic value of the option, at $8.25
So we can infer that you would have had to get this put when the stock price was AT LEAST $6.75, but given the 3 months of theta left, it was likely above $7
The value of the put if the price of the underlying asset (the stock ABC) meandered between $5 - $7 would be somewhere between $10 - $8 at expiration.
So you don't really stand to lose much in this scenario, and can make a decent gain in this scenario. I mean decent if you were trading stocks and were trying to beat the S&P or keep up with Warren Buffett, but a pretty poor gain since you are trading options!
If the stock moves above $7 this is where the put starts to substantially lose value.
CQM
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