You believe the announced takeover of HUM (Humana) will fall through so you bought puts for 1,000 shares with a strike price of $165/share. They expire on May 20, 2016. The current price of HUM is $182.54/share. You paid $5.59/share for the puts for a total of $5,590.
a. Are your puts ATM, OTM, or ITM, and by how much?
b. What is the intrinsic value of your puts per share? What is the time value of your puts per share?
c. Happy Days! The would-be buyer of Humana, United Health is indicted by the Feds for price fixing. HUM stock falls to $150/share. Your puts are now trading at $19.00/share. Are your puts now ITM, ATM, or OTM, and by how much?
d. This is exactly what you hoped for, and do not believe the stock will fall further. In fact you are worried it might rise if the deal doesn’t collapse. Since your puts are American, you can exercise them immediately. If you did, you would be selling HUM for $165/share. You would need to buy shares in the market at $150/share to deliver for your sale. What would be your all-in profit per share and in total, including the cost of your puts?
e. Instead of exercising your puts what other action could you take? What would be your profit in that case?