Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be?

pretax net profit is 1989.75

Explanation:

Given data

current level = $82.50

time = 5 month

buy = $510.25

sell = 100 shares

price = $85 per share

option cost = $510.25

price actually dropped = $60

to find out

pretax net profit

solution

we first calculate profit per share that is

profit per share = price - price actually dropped

profit per share = 85 - 60

profit per share = $25

so

net profit will be = profit per share * sell - option cost

put here these value

net profit = (25 * 100) - 510.25

so pretax net profit is 1989.75