Simple options question?

Question

If i purchase a Jan 27.5 put option at a premium of $1.2, at what price will i begin to make a profit?
Is it at 27.5 or at 26.3? Thanks!

Answer 1

I agree with what Ranto said, but let me expand on it a little.

As he noted, the price of the option can change for reasons other than a change in the price of the underlying.

It is true that AT EXPIRATION the underlying will have to be below 26.3 to realize a profit, but PRIOR TO EXPIRATION any time the price of the option goes above your purchase price you can sell it for a profit, regardless of the price of the underlying.

The rate at which the price of an option changes due to a change in the price of the underlying is called "delta" when calculating options prices. The delta of a put option is always negative, so the option always gains in value when there is a decrease in the price of the underlying. As soon as the price of the underlying falls enough to raise the bid quote for the option to a price higher than you paid, you can sell for a profit.

Answer 2

You can profit any time the price of the option is greater than $1.20. A decrease in asset price causes the contract to increase in value. It will be worth more than $1.20 if the asset price is below $26.30.

There are five inputs to the Black-Scholes options pricing model. They are:

Asset Price -- As already discussed, puts increase in value when asset price falls.

Strike Price -- SInce this is fixed at $27.50 it does not affect your options.

Risk Free Rate: While this has an effect, it is minimal & you can pretty much ignore it.

Time to maturity -- This can only go down -- decreasing time will decrease the value of any option

Volatility -- Increasing the volatility will increase the value of the option. This is the second most common reason (after change in asset price) for the change in value of an option contract.

Answer 3

A put option means you will make money if the stock declines in value. Since the strike price is $27.50 and you paid $1.20 for the right, the stock must decline to $26.30 for you to break-even (before commissions). You start to make a profit at 26.29.

Answer 4

26.3. if it stays at 27.5 u will loose $1.2, which is the strike price. u need to overcome that at $26.3 to start making a profit

Answer 5

If the price of the security stays at 27.5, the value of your put will decline every day. Once the security falls below that, you are "in the money", meaning your option is worth something, but you will not be profitable at the end till 26.3. You can sell it at any time before expiration and possibly make a profit, though.