for protective put, if the exercise price is less than estimated stock price at expiration, will we use stock price at expiration instead of exercise price to calculate the maximum loss?
Maximum loss of a protective put is (S0 - X) + P0. Recall that a protective put consists of a long put position and a long stock position.
Yes but I solved a question where instead of exercise price, we used stock price at expiration rather than exercise price.
Stock at expiration is 38.80
Current stock price 41.48
Dec 39 put price 4.20
Dec 38 put price 3.62
And we are asked to find difference in expected loss from protective put strategies using Dec 38 and Dec 39 puts
Anyone please?
So a European style put, all good.
On the Dec 39 you would lose 41.48 - 39 (strike) = 2.48 on the stock, plus 4.20 (very expensive) on the premium. Total = 6.68
On the Dec 38 you would lose 41.48 - 38.80 = 2.68 (expiration price, as option is out of the money), plus 3.62 on the premium. Total = 6.30
Unless I’m missing something in the details you have provided. Will leave it to you to work out the BEP of each
Got it! I was thinking about max loss for both
Thank you so much!
Great stuff, no worries at all mate.