Put options are purchased in the expectation that the

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Unformatted text preview: to an amount less than $250. Put options are purchased in the expectation that the share price of a given security will decline over the life of the option. Purchasers of puts commonly own the shares and wish to protect a gain they have realized since their initial purchase. Buying a put locks in the gain because it enables them to sell their shares at a known price during the life of the option. Investors gain from put options when the price of the underlying stock declines by more than the per-share cost of the CHAPTER 16 Hybrid and Derivative Securities 697 option. The logic underlying the purchase of a put is exactly the opposite of that underlying the use of call options. EXAMPLE Assume that Don Kelly pays $325 for a 6-month put option on Dante United, a baked goods manufacturer, at a striking price of $40. Don purchased the put option in expectation that the stock price would drop because of the introduction of a new product line by Dante’s chief competitor. By paying $325, Don is assured that he can sell 100 shares of Dante at $40 per share at any time...
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This document was uploaded on 01/19/2014.

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