You bought Cisco Systems at $16. You think it will rebound but are unsure about current market conditions. You can hold the stock. Or for $3.50, you can buy a put option that gives you the right to sell your stock for $15 by Jan. 18, 2003.
HOLD THE STOCK BUY A PUT
COST (100 SHARES) $1,600 $1,950 ($1,600 stock purchase price plus $350 put price)
STOCK GOES TO $25 $900 profit $550 ($900 profit from stock less $350 spent for put)
% GAIN 56.3% 28.2%
STOCK GOES TO $10 $600 loss $450 loss ($1,600 purchase price for the stock, plus $350 price for the put, minus the $1,500 sale price on the stock)
% LOSS 37.5% 23.0%
Before it's here, it's on the Bloomberg Terminal. LEARN MORE