X-Ray Inc. stock currently sells for $49, but you believe itsprice will decline over the next six months. You decide to use 10six-month European put options to speculate on your belief. Eachput option carries an exercise price and premium of $44 and $.80,respectively.
Which of the following best describes the initial position youshould take with the put contracts?
- Sell 10 put options and receive $800 in option premiums.
- Buy 10 put options and receive $800 in option premiums.
- Buy 10 put options and pay $800 in option premiums.
- Sell 10 put options and pay $800 in option premiums.
- None of the above.
What must X-Ray's share price be at expiration for you to breakeven? Round intermediate steps to four decimals and your finalanswer to two decimals.
Find your profit/loss if the stock sells for $43.75 when theoptions expire.
- 550
- -550
- -800
- 800
- None of the above
Now suppose that instead of using options, you chose to use 1000shares of the stock to speculate on its depreciation over thesix-month time frame. Find your profit/loss if the stock sold for$43.75 at the end of six months.
