Put option exercise

Put Option: creating leverage

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Put option exercise

From the Real Estate Put Options example provided here, the investor sells a put option on a property in La Jolla, CA. Put option is sold as an "American Put", which can be exercised at any time. IRESE has a restriction on the Home Equity Protection Plan that is used to underwrite Real Estate Put Options. The claim on Home Equity Protection Plan can only be filed when property owner sells or refinance the property, which would in turn will trigger an exercise of the Real Estate Put Option.

Term 5 years; Option Price is $0.31 per share; Strike Price $700,000
Put Scenario	Jan 1st 2008	in 3 years	in 3 years	in 3 years (gain)
Derived Property Value	$ 1,000,000	$ 1,100,000	$ 800,000	$ 600,000
Strike Price		$ 700,000	$ 700,000	$ 700,000
Investor Payment		-	-	$ 100,000 or $100 per share

Consider Scenario 1 and 2

For example, if the property is sold in 3 years and the derived property value is $1,100,000, the investor payment is $0 since the derived property value is less the strike price. The same for the scenario 2.

Consider Scenario 3

If derived property value is $600,000, the difference is $100,000 or $100 per share and the investor payment is $100 per share as shown in the table.

Put Option: creating leverage