Debt Management and Leverage

Option contracts

Put options exercise

If you have a portfolio of 1,000 shares it would be worth 1,000 times $11, being $11,000.

If you did not have a Put Option and the shares dropped to $6, your shares would be worth 1,000 times $6, being $6,000. So you would have lost $5,000.

However, let’s say you purchased 1,000 Put Options at a cost of $1 each ($1,000) with a strike price of $10.

If the shares did drop to $6, you would exercise your Put Option to sell them at $10. Therefore your loss would be the share price drop from $11 to $10, plus the $1,000 to purchase the options.

So in this case the total loss would be $2,000. Therefore having the Put Options in this case reduced the loss from $5,000 to $2,000.

If the share price rose, the option would expire worthless and the upfront investment of $1,000 for the Put Options would be lost.