Transcript: Calculate the gain or loss on a put option

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[CIBC Investor’s Edge] 

[Calculate the gain or loss on a put option] 

[A closed laptop is shown, which opens to show a bar graph and a line graph on its monitor.]

[A CIBC Investor’s Edge employee stands in front of a wall with the CIBC logo on it and speaks.]

>> CIBC Investor’s Edge employee: Let's illustrate a put option which you would purchase if you have a bearish view on a particular company or you would like to buy insurance on some of your existing portfolio holdings.

Here we have XYZ trading at $18. We buy ten contracts of the $15 put for $2 per contract.

[The laptop monitor shows a line graph that moves up and down, buy is mainly moving up. The graph is titled “Buy 10 contracts of $15 put for $2/contract. Premium = 1,000 × $2 = $2,000.”] The legend explains that blue represents the “Share price.” On the left side are dollar amounts, starting at $5, then $10, $15 and $20. To the right is a point labelled “current stock price: $18.” The $18 is highlighted in blue.

If the stock closes at $8 on expiry, it would be $7 in the money, so our profit would be $5 per contract, or $5,000.

[A dotted line appears across the graph, ending at the strike price. The graph line, which has gone down, shows “$8 on expiry” highlighted in blue. The area between the two points is shaded and shows a calculation of “$15 strike price - $8 on expiry = $7 in the money.” This calculation changes to: “$7 in the money - $2 premium/contract = $5/contract = $5,000.”]

Now, what would happen if the stock closed at $16.50 on expiry? The $15 put would be out of the money and therefore worthless. You would lose the $2,000 premium you initially paid.

[The graph then changes so the graph line increases to show “$16.50 on expiry.” The section from the $15 strike price dotted line all the way to the top of the graph is shaded and is titled “out of the money.” This is then changed to “worthless.” In the graph title “Premium = 1,000 × $2 = $2,000,” the “$2,000” is then circled.]

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[CIBC Investor’s Edge is a division of CIBC Investor Services Inc. This document is provided for general informational purposes only and does not constitute investment advice. The information contained in this document has been obtained from sources believed to be reliable and believed to be accurate at the time publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. The CIBC logo is a registered trademark of CIBC. The material and its contents may not be reproduced without the express written consent of CIBC.]

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