3. You purchase an August 2016 put option on Apple today with a strike price of

Question

3. You purchase an August 2016 put option on Apple today with a strike price of $80 for $1.45. Today (May 1, 2016), Apple’s stock price is $94. Answer the following 5 questions. (5 points) a. What is the intrinsic value of this put option today? b. What is the time value of this put option today? c. If the price of Apple increased by $1 tomorrow, what would happen to the value of this put option? Would it increase, decrease, or be unaffected? d. If the volatility in Apple’s stock price returns decreased, what would happen to the value of this put option? Would it increase, decrease, or be unaffected? e. If Apple increases its dividend payouts, what would happen to the value of this put option? Would it increase, decrease, or be unaffected?

Explanation / Answer

Solution:

The intrinsic value of put option is computed using the formula = Strike price - underlying price

and the only option has intrinsic value which are in the money where for a put option in the money the strike price should be more than the underlying price hence there is no intrinsic value because it is negative and the strike price is lesser than the underlying price hence = 80 - 94 = - $14 = 0

The time value of put option today is = Premium - intrinsic value

= 1.45 - (- 14) = 15.45

c)

If the price increases by 1 tomorrow the value of the put option will decrease as it will move out of the money and the value of the put option will decreases as it will start moving far ahead from the exercise price.

d) If the volatility in apples stock price decreased then the value of the put option would stay unaffected as the volatility makes the movement ot happen and if there is less volatility then no changes in the value of the put option

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