Explanation:
A protective put is:
$18$2Maximum 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:
$18$14 (exercise the put)$2$6Therefore, the correct answer is unlimited and -$6.
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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)