An investor purchases 100 shares of stock for $20 per share. The stock has now risen in price to $44 per share
To cover potential losses, the investor purchases a put option for a premium of $300 with an exercise price of $42 per share. The stock falls to $28 per share, and the investor exercises the option and sells the shares at $42 per share. Ignoring brokerage commissions and taxes, what would be the investor's return from the stock?
A) 120%
B) 110%
C) 95%
D) 70%
Answer: C
Explanation: C)
100 shares × $42 = $4,200 (proceeds from exercising option)
100 shares × $20 =-$2,000 (cost of stock)
-$300 (cost of option)
$1,900 (net gain)/$2,000 = 95 percent
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