Ed martin, the pension fund manager for Strak Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle, Inc. The option to sell 100 shares of Carlisle, Inc at any time during the next 90 days at a strike price of $45 can be purchased for $380. The stock of Carlisle is currently selling for $46 per share.
a. Ignoring any brokerage fees or dividends, what profit or loss will Ed make if he buys the option and the lowest price of Carlisle stock dring the 90 days is $46, $44, $40 and $34?
b. What effect would the fact that the price of Carlisle's stock slowly rose from its initial $46 level to $55 at the end of 90 days have on Ed's purchase?
c. In light of your findings, discuss the potential risks and returns from using put otions to attempt to profit from an anticipated decline in share price?