Question: Refer to Problem. What would the loss of the seller of the put option be if, at expiration, XLB is trading at $20? What would the profit of the seller be if, at expiration, XLB is trading at $25?
Problem: You believe that oil prices will be rising more than expected and that rising prices will result in lower earnings for industrial companies that use a lot of petroleum-related products in their operations. You also believe that the effects on this sector will be magnified because consumer demand will fall as oil prices rise. You locate an exchange-traded fund, XLB, that represents a basket of industrial companies. You don't want to short the ETF because you don't have enough margin in your account. XLB is currently trading at $23. You decide to buy a put option (for 100 shares) with a strike price of $24, priced at $1.20. It turns out that you are correct. At expiration, XLB is trading at $20. Calculate your profit.
