Response to the following problem:
Dorothy McBride does a lot of investing in the sharemarket and is a frequent user of market-index options. She is convinced that the market is about to undergo a broad retreat and has decided to buy a put on the ASX 200. The put carries a strike price of 3150 points and is quoted in the financial press at 52.
Although the ASX 200 is currently at 3130, Dorothy thinks it will drop to 3075 by the expiration date on the option. How much profit will she make, and what will be her holding period return if she is right?
How much will she lose if the ASX 200 goes up (rather than down) by 55 points and reaches 3185 by the date of expiration?