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Put Option Example
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Biogen Idec Symbol BIIB:
SMF Investors & Traders purchased 1,000 shares of BIIB a leading biotech company on 7-7-08 at $58.50
1,000 shares at $58.50 = $58,500 investment
The stock starts its break out 10 days later on 7-18-08 to $73.59 on 7-31-08. A total net gain of $14,840 and all investors and traders were feeling very comfortable with their gains. Investors, Traders and SMF felt there was no reason to sell the stock based on its strong performance at the time. However, to protect our profits and investment capital our SMF expert risk management department recommended we purchase 100 August $55 Put Contracts for $.10 just in case the stock ever gapped down.
100 contracts at $.10 = $1,000 investment to hedge the down side risk to protect capital
On 7-31-08 Biogen Idec Inc. and Elan Corporation reported to regulators two more cases of the potentially fatal brain infection PML among patients taking their multiple sclerosis drug Tysabri. On 8-01-08 this news caused the stock to gap down $18.10 or 26% to $49.84.
Table A represents the initial purchase of 1,000 shares of BIIB at $58.50 which were sold at $50.00.
Table A
| Stock |
Shares |
Purchase Price |
Cost of Purchase |
Sale Price |
Loss |
| BIIB |
1,000 |
$58.50 |
$58,500 |
$50.00 |
$ (8,500) |
Table B represents the purchase of 100 August $55 Puts of BIIB at $.10 which were sold at $5.50.
Table B
| Option |
Contracts |
Purchase Price |
Cost of Purchase |
Sale Price |
Profit |
| BIIB $55 Put |
100 |
$.10 |
$1,000 |
$5.50 |
$ 54,000 |
Table C represents the combination of Table A and B.
Table C
| BIBB Holdings |
Investment |
Proceeds |
Gain/Loss |
% Gain/Loss |
| 1,000 Shares of BIIB |
$58,500 |
$50,000 |
$ (8,500) |
-14.53% |
| 100 Contracts of BIIB $55 Put |
$1,000 |
$55,000 |
$ 54,000 |
5,400% |
| Net Profit |
|
|
$ 45,500 |
76.47% |