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Answer: unlimited (max net profit) and -$6 (max net loss)
A protective put is: - **Long stock at $18** - **Long put costing $2** Maximum profit is **unlimited** because the stock can rise without bound, and the put simply expires worthless in that case. Maximum loss occurs if the stock falls to zero: - Stock loss = **-$18** - Put payoff = **+$14** (exercise the put) - Premium paid = **-$2** - Maximum net loss = **-$6** Therefore, the correct answer is **unlimited and -$6**.
Author: Manit Arora
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Q-183.4. A six-month put option with a strike price of $14.00 has a price (option premium) of $2.00 when the underlying stock price is $18.00. If a trader employs a protective put strategy (i.e., with the OTM put option), what are, respectively, the maximum net profit (reward) and the maximum net loss (risk) possible? note: consistent with profit pattern charts, please disregard the time value of money.
A
$14 (max net profit) and -$6 (max net loss)
B
unlimited (max net profit) and -$6 (max net loss)
C
unlimited (max net profit) and -$14 (max net loss)
D
unlimited (max net profit) and unlimited (max net loss)
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