Jamie is bearish on the stock of the Apple Corporation.

Question

Therefore, Jamie purchases four put option contracts on Apple stock at an option price of $3 per share and with the strike price at $40. Each option contract has a lot size of 1,000 shares. 

If Jamie is correct and Apple’s price falls to $30, how much profit will he earn over the 3-month period? 

Answer 1

Jamie buys 4 put option contracts.

Each contract covers 1,000 shares, so:

4 × 1,000 = 4,000 shares

The strike price is $40 and Apple falls to $30, so the put option is worth:

$40 - $30 = $10 per share

However, Jamie paid a premium of $3 per share, so his net profit is:

$10 - $3 = $7 per share

Total profit:

$7 × 4,000 = $28,000

Another way to show it:

Gross payoff = ($40 - $30)(4,000) = $40,000

Cost of options = $3(4,000) = $12,000

Profit = $40,000 - $12,000

= $28,000

Therefore, Jamie earns a $28,000 profit over the 3-month period.