Refer to the stock options on Apple in the Figure 2.9. Suppose you buy an August

Question

Refer to the stock options on Apple in the Figure 2.9. Suppose you buy an August expiration call option with exercise price $350. If the stock price in August is $365, will you exercise your call? Yes No What is the net profit/loss on your position? (Input the amount as a positive value.) What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Would you exercise the call if you had bought the August call with the exercise price $355? Yes No What is the net profit/loss on your position? (Input the amount as a positive value.) What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) What if you had bought an August put with an exercise price of $350 instead? Would you exercise the put at a stock price of $350? Yes No What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Explanation / Answer

a-1) Yes.

a-2) Net Profit of $1500.

The call is exercise and the shares are bought at 350 and sold at 365; a profit of 15 per unit. For 100 shares it would be 1500.

a-3) Rate of return = 15/350 = 4.29% for the period of holding. Is not annualised as the period of holding is not given.

b-1) Yes.

b-2) Net profit = $1000

b-3) Rate of return = 10/355 = 2.82%

c-1) No.

c-2) Rate of return = 0. The option is allowed to lapse.

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