Recently, Alibaba stock (symbol BABA) closed at $115.10 a share, up $.26 on the
ID: 2717717 • Letter: R
Question
Recently, Alibaba stock (symbol BABA) closed at $115.10 a share, up $.26 on the day. Consider the following chart giving the premium as of close of trading on that day on various options on Alibaba shares:
a. What is the premium on the December, 115 call, i.e. the call option which expires on the third Friday of December, and has a strike price of $115?
b. How much would an investor who wanted to buy 1 contract of this option have had to spend (before considering any commission or fees)?
c. What is the formula for the intrinsic value of a call? What was the intrinsic value of the Dec. 118 call? Was this option “in the money” or “out of the money”? What was the time value of this option?
d. Was the Dec. 114 call in or out of the money? What was the intrinsic value of this option? What was the time value of this option?
e. What was the premium on the Dec. BABA 118 put? Was this option in or out of the money? What was the intrinsic value of this put? What is the time value?
f. What was the intrinsic value of the Dec. BABA 112 put? Was this option in or out of the money? What was the option’s time value?
g. Based on the $115.10 price of Alibaba’s shares, what is the leverage on the Dec. 119 call? Round your answer to two decimal places.
h. Draw a hockey stick diagram for a short position in the BABA Dec. 119 call.
I. Draw a hockey stick diagram for a long position in the BABA Dec. 118 put.
Calls Last Sale Net Bid Ask Vol Open Int Puts Last Sale Net Bid Ask Vol Open Int BABA1405L110-E 7.03 -0.52 6.70 7.30 26 909 14 Dec 110.00 BABA1405X110-E 2.12 +0.26 1.95 2.20 5 295 BABA1405L111-E 6.40 -0.25 6.10 6.70 36 42 14 Dec 111.00 BABA1405X111-E 2.64 0.0 2.30 2.60 0 54 BABA1405L112-E 5.86 -0.19 5.50 6.10 14 298 14 Dec 112.00 BABA1405X112-E 2.78 0.0 2.70 3.00 0 122 BABA1405L113-E 5.19 -0.45 4.90 5.40 35 63 15 Dec 113.00 BABA1405X113-E 3.83 +0.33 3.10 3.70 1 39 BABA1405L114-E 4.75 -0.25 4.50 5.00 27 256 15 Dec 114.00 BABA1405X114-E 3.88 +0.07 3.60 4.10 20 169 BABA1405L115-E 4.22 -0.48 4.10 4.40 20 1869 15 Dec 115.00 BABA1405X115-E 4.46 +0.16 4.10 4.70 53 352 BABA1405L116-E 3.82 -0.91 3.70 4.00 11 326 16 Dec 116.00 BABA1405X116-E 5.24 +0.79 4.60 5.40 10 27 BABA1405L117-E 3.49 -0.74 3.30 3.60 13 228 16 Dec 117.00 BABA1405X117-E 5.76 +1.26 5.20 6.00 11 95 BABA1405L118-E 3.05 -1.53 2.95 3.20 1 196 16 Dec 118.00 BABA1405X118-E 5.20 0.0 5.90 6.70 0 54 BABA1405L119-E 3.20 0.0 2.45 2.90 0 361 17 Dec 119.00 BABA1405X119-E 5.12 0.0 6.50 7.40 0 160 BABA1405L120-E 2.42 -0.32 2.30 2.60 776 2543 17 Dec 120.00 BABA1405X120-E 5.80 0.0 7.20 8.00 0 106Explanation / Answer
a. What is the premium on the December, 115 call, i.e. the call option which expires on the third Friday of December, and has a strike price of $115?
Answer: The premium is $4.22
b. How much would an investor who wanted to buy 1 contract of this option have had to spend (before considering any commission or fees)?
Answer: He has to spend the ask premium which is $4.4.
c. What is the formula for the intrinsic value of a call? What was the intrinsic value of the Dec. 118 call? Was this option “in the money” or “out of the money”? What was the time value of this option?
Answer:
Intrinsic value of call = underlying price – strike price
Here we have underlying price = $115.1
And strike price = $118
Therefore,
Intrinsic value = $115.1 - $118 = -$2.9
The option is out of the money.
Time value of option = premium – intrinsic value = $3.05 - $2.9 = $.15
d. Was the Dec. 114 call in or out of the money? What was the intrinsic value of this option? What was the time value of this option?
Answer:
For Dec.114 call:
Intrinsic value of call = underlying price – strike price
Here we have underlying price = $115.1
And strike price = $114
Therefore,
Intrinsic value = $115.1 - $114= $1.1
The option is in the money.
Time value of option = premium – intrinsic value = $4.75 - $1.1 = $3.65
e. What was the premium on the Dec. BABA 118 put? Was this option in or out of the money? What was the intrinsic value of this put? What is the time value?
Answer:
Premium on Put = $5.2
Intrinsic value of put = strike price - underlying price
Here we have underlying price = $115.1
And strike price = $118
Therefore,
Intrinsic value = $115.1 - $118 = -$2.9
The option is out of the money.
Time value of option = premium – intrinsic value = $5.2 - $2.9 = $2.9
f. What was the intrinsic value of the Dec. BABA 112 put? Was this option in or out of the money? What was the option’s time value?
Intrinsic value of put = strike price - underlying price
Here we have underlying price = $115.1
And strike price = $112
Therefore,
Intrinsic value = $115.1 - $112 = $3.1
The option is in the money.
Time value of option = premium – intrinsic value = $2.78 - $3.1 = -$0.32
g. Based on the $115.10 price of Alibaba’s shares, what is the leverage on the Dec. 119 call? Round your answer to two decimal places.
Answer:
Assuming delta as 0.5
We have
Leverage = (delta x price of underlying security)/price of option
Leverage = (0.5 x $115.1) / $3.1 = 18.56
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