Value of the put insurance in a crash
You own a stock bought at $50 and buy a put struck at $45 for a premium of $3 (a protective put). At expiry the stock has crashed to $38. Compared with having held the stock unhedged, how many dollars did owning the put save you? (in dollars)
Show hints (2)+
- Compare the unhedged loss (50 − 38) with the hedged loss (floored stock loss + premium).
- Savings = unhedged loss − hedged loss; equivalently put payout − premium.
Answer
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4
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Asked at: Game-Based Aptitude, Options Market-Making