You have purchased a put option on Kimberly Clark common stock. The option has an exercise price of $65.00 and Kimberly Clark’s stock currently trades at $66.18. The option premium is $1.25 per share.
a. Calculate your net profit on the option contract if Kimberly Clark’s stock price falls to $63.00 and you exercise the option.
Net Profit = Exercise Price - Purchase Cost – Final Stock value
b. Calculate your net profit on the option contract if Kimberly Clark’s stock price does not change over the life of the option.
First, decide if you will exercise the option. If so, use the formula in part a. If not, you lose the value of buying the contract.