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?– VictorOct 19, 2014 at 20:17
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I think he means the $15 strike.– JTP - Apologise to Monica ♦Oct 19, 2014 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.– VictorOct 19, 2014 at 22:26
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not enough information without the strike price– CQMOct 19, 2014 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, 2014 at 23:20
2 Answers
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.
$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.