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-120,000

Notice that the net profits to the option buyer (calculated previously) are just the oppo-sites of these amounts.

EXAMPLE 141 | Put Payoffs

-1—' Looking at Table 14.1, suppose you buy 10 AOL January 42.50 put contracts. How much does this cost (ignoring commissions)? Just before the option expires, AOL is selling for $22.50 per share. Is this good news or bad news? What is your net profit?

The option is quoted at 11, so one contract costs 100 X 11 = $1,100. Your 10 contracts total $11,000. You now have the right to sell 1,000 shares of AOL for $42.50 per share. If the stock is currently selling for $22.50 per share, then this is most definitely good news. You can buy 1,000 shares at $22.50 and sell them for $42.50. Your puts are thus worth $42.50 -22.50 = $20 per share, or $20 X 1,000 = $20,000 in all. Because you paid $11,000, your net profit is $20,000 - 11,000 = $9,000.

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