(a) Will call buyer exercise the call when market price on July 19 is $90?Please

ID: 2620284 • Letter: #

Question

(a) Will call buyer exercise the call when market price on July 19 is $90?Please answer yes or no. Suppose you write a IBM call which was sold for $7.00 on Apr 9 2013 with exercise price X=$110, on Expiration date July 19,2013, given different possibilities of market prices, please answer. Hint: Profit/ loss is not payoff.Each put is 100 shares.

how much is total profit/loss for put writer( who writes a call) if the market price on July 19 is $100? each option contract is 100 shares

How much is the total profit/loss for a put writer when market price on July 19is $140? each option contract is 100 shares

ST: Market price Will put Dollar of IBM buyer exercise profit/loss 19 July 2013 the put?(yes or no) to put writer 0 80 90 100 110 120 130 140 150 160 170 180 190

Explanation / Answer

Profit / loss to call writer on expiration (July 19, 2013) for a call option with Strike price of $110 and call premium of $7:

ST: Market price

Will call

Dollar

of IBM

buyer exercise

profit/loss

19-Jul-13

the call?(yes or no)

to call writer

100

110

120

Yes

-$3

130

Yes

-$13

140

Yes

-$23

150

Yes

-$33

160

Yes

-$43

170

Yes

-$53

180

Yes

-$63

190

Yes

-$73

It is evident from the above table that the option buyer will exercise call option only when the spot price is greater than the strike price of $110.

If the call option is not exercised, the profit to call writer will be price of call option $7

If the call option is exercised, the loss to call writer will be equal to

Loss = exercise price ($110) - market price of IBM stock + price of call option ($7) (negative sign is for loss)