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?

  • 2
    What 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
  • I think he means the $15 strike. – JTP - Apologise to Monica Oct 19 '14 at 20:49
  • @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
  • not enough information without the strike price – CQM Oct 19 '14 at 22:28
  • @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

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.

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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.

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