calls puts Strike Premium Strike premium 82.5 5.75 82.5 1.05 85 4 85 1.40 87.5 2
ID: 2724381 • Letter: C
Question
calls
puts
Strike
Premium
Strike
premium
82.5
5.75
82.5
1.05
85
4
85
1.40
87.5
2.45
87.5
2.85
90
1.40
90
5.30
92.5
.70
92.5
8.15
95
0.32
95
12.65
Early last year you purchased 500 shares of Mrs. Davis Cookie Company, Inc. (Stock symbol CC). You paid $62 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. calls Strike Premium Strike premium 82.5 5.75 82.5 1.05 85 4 85 1.40 87.5 2.45 87.5 2.85 90 1.40 90 5.30 92.5 .70 92.5 8.15 95 0.32 95 12.65 Devise a strategy using options from the above table that is appropriate, given your parameters. Provide a drawing/graph that depicts that strategy.
calls
puts
Strike
Premium
Strike
premium
82.5
5.75
82.5
1.05
85
4
85
1.40
87.5
2.45
87.5
2.85
90
1.40
90
5.30
92.5
.70
92.5
8.15
95
0.32
95
12.65
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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