Given the following information, price of a stock $103 strike price of a six-mon

Question

Given the following information, price of a stock $103 strike price of a six-month call $102 market price of the call $6 strike price of a six-month put $102 market price of the put $5 answer the following sentences.

b. What is the time premium paid for the put? Round your answer to the nearest dollar. $

c. If an investor establishes a naked call position, what amount is received? Round your answer to the nearest dollar. $

d. What is the most the buyer of the call can lose? Round your answer to the nearest dollar. $

At the expiration of the options (i.e., after six months have elapsed), the price of the stock is $95.

f. What is the profit (loss) from buying the stock? Round your answer to the nearest dollar. $_____?

g. What is the profit (loss) from buying the call? Round your answer to the nearest dollar. $______?

h. What is the profit (loss) from writing the call covered? Round your answer to the nearest dollar is $___?

i. What is the profit (loss) from selling the put? Round your answer to the nearest dollar. $___?

j. At expiration, what time premium is paid for the call? Round your answer to the nearest dollar. $___?

Explanation / Answer

Solution:

b. The time premium paid for the put is $5 (market price of put).

c. Amount received = $6 (102)

Amount received = $612

d. The most the buyer of the call can lose is $612.

f. Profit = $103 - $95

Profit = $8/share

g. profit = $612 (the call would have expired worthless).

h. $816 would be lost from the fall in the stock price, $612 would be earned from the expired call. A net of $204 would be lost.

i. $5 ($510) would be received from selling the put (the seller would be forced to buy the stock at $102 (the strike)). So the stock is at $95, the put seller would lose $7 ($714) on the stock and gain $510 on the put premium, a net loss of $204.

j. At expiration, the time premium for an option is equal to ZERO. There is no time left.

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