A portfolio manager holds 500 shares of XYZ Corp. which are currently trading at $60 per share. To protect against a potential short-term decline in the stock price, she buys 5 XYZ put option contracts with a strike price of $55, expiring in three months, for a premium of $3 per share. If the stock price drops to $50 at expiry, what is the net profit/loss for the entire position (shares + options)?

Question: A portfolio manager holds 500 shares of XYZ Corp. which are currently trading at $60 per share. To protect against a potential short-term decline in the stock price, she buys 5 XYZ put option contracts with a strike price of $55, expiring in three months, for a premium of $3 per share. If the stock price drops to $50 at expiry, what is the net profit/loss for the entire position (shares + options)?

Answer options: ✅ -$1,500

• -$2,500
• -$3,000
• -$4,000

Correct answer: -$1,500

Explanation: The loss on shares is (60-50)*500 = $5,000. Each option contract covers 100 shares, so 5 contracts cover 500 shares. The profit from options is (55-50)500 = $2,500. The cost of options is $3500 = $1,500. Net profit/loss = -$5,000 + $2,500 - $1,500 = -$4,000.