Buying OEX Puts

 

OEX Index is between 595 and 584 at expiration
 

Buy 1 OEX 595 Put at $11

 
With the OEX exercise settlement value exactly at the strike price of $595 at expiration, the 595 put would be at-the-money and have no value.

With OEX at the break-even point of 584 at expiration, the 595 put would be in-the-money and exercised.

The cash settlement amount received upon exercise would be:

$595 (put strike price) – 584 (settlement value) = $11 x $100 = $1,100

On the other hand, if the put were sold for its intrinsic value of $11 (595 put strike price – 584 OEX level) at this point, the premium received would be:

$11 x $100 multiplier = $1,100

This amount of $1,100 is the total cost of the put.

If the OEX exercise settlement value is between 595 and 584 at expiration, the 595 put will also be in-the-money and would be exercised. The cash settlement amount received, however, would be less than the total cost of the put, resulting in a partial loss for the position.

For example, say the exercise settlement value is 590 at expiration. The cash settlement amount received upon exercise would be:

$595 (put strike price) – 590 (settlement value) = $5 x $100 = $500

If the put were sold for its intrinsic value of $5 (595 put strike price – 590 OEX level) at this point, the premium received would be:

$5 x $100 multiplier = $500

OEX did decline in value, but not as much as anticipated. The put that originally cost a total of $1,100 is now worth $500, so the investor can recoup some of its initial purchase price and realize a partial loss.

   $1,100   total premium paid for put
 –   $500   cash settlement amount received at put’s exercise (or sale at intrinsic value)
     $600   partial loss

 
 

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