Suppose you own 5000 shares that are worth 25 each How can p

Suppose you own 5,000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of your holding over the next four months?

**Can you please explain step by step on how to do this question*** and please show formulas used so I can understand how to do it on my own. thank you.

Solution

We should buy 50 put option contracts (each on 100 shares) with a strike price of $25 with an expiration date in four months. If at the end of four months the stock price is less than $25, then we can easily exercise the options and sell the shares at $25.