You obtain the following information concerning a stock, a call option, and a put option: Price of the stock $42 Strike price (both options) $40 Price of the put $3 Expiration date three months You want to purchase the stock but also want to use an option to reduce your risk of loss.
a) Do you need to purchase or sell the put option?
b) What is the cash inflow or outflow from your position when you purchase your put option?
c) What is the total profit or loss if the price of the stock stagnates and trades for $42 after three months?
d) What is the total profit or loss if the price of the stock trades for $50 after three months?
e) What is the total profit or loss if the price of the stock trades for $30 after three months?