Early last year you purchased 500 shares of Mrs. Davis Cookie Company. Inc. (Sto

Question

Early last year you purchased 500 shares of Mrs. Davis Cookie Company. Inc. (Stock symbol CC). You paid S62 per share. The current stock price is $85 per share. You do not want to sell your stock but you want to protect all of your unrealized gain ($23). You believe that the stock may continue to rise by another 4% - 5% and you want your portfolio to benefit from any such price gains. The following options (puts and call) with July expirations are available. Devise a strategy using options from the above table that is appropriate, given your parameters. Provide a drawing/graph that depicts that strategy. B-From the table above, calculate the intrinsic value and the time value of the following options: 82.5 Call 85 Call 87.5 Call 82.5 Put 92.5 Put

Explanation / Answer

Intrinsic value = max ( Stock price – strike price , 0)

Time value = option premium – intrinsic value

Part a) 82.50 call

Intrinsic value = 85-82.50

                                = 2.50

Time value = 5.75-2.50

                      =3.25

Part b) 85 call

Intrinsic value = 85-85

                                = 0

Time value = 4-0

                      =4

Part c) 87.50 call

Intrinsic value = max( 85-87.50,0)

                                = 0

Time value = 2.45-0

                      =2.45

Part d) 85 put

Intrinsic value = max (82.50 – 85, 0)

                                = 0

Time value = 1.05 -0

                      =1.05

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