Problem:
We buy a put option of Stefanic and associates. Its premium is $1 and the strike price is $34. The current market price is $40. If the price drops to $20, shall we exercise the put option? If not, why not, and If yes, why yes? Compare the two cases of owning the stock versus not owning it in terms of rate of return the investor makes. Assume that we bought it for $30. Describe in detail and explain all workings and formulas.