[Financial_A1d]

An investor does a lot of investing in the stock market and is a frequent user of the stock-index options. The investor is convinced the market is about to undergo a broad retreat and has decided to buy a put on the S&P 100 index. The put carries a strike price of 690 and is quoted in the financial press at 4.50. Although the S&P 100 stocks is currently at 686.45, Dorothy thinks it will drop to 665 by the expiration date of the option.

1. How much profit will she make, and what will be her holding period return if she is right?

2. How much will she lose if the S&P 100 goes up (rather than down) by 25 points and reaches 715 by the date of expiration?