Calculating Payoffs Use the option quote information shown here to answer the qu
ID: 2731696 • Letter: C
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Calculating Payoffs Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114. Option and Strike Calls Puts NY Close Expiration Price Vol. Last Vol. Last Macrosoft February 110 85 7.60 40 0.60 March 110 61 8.80 22 1.55 May 110 22 10.25 11 2.85 August 110 3 13.05 3 4.70 a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring commissions? b. In part (a), suppose that Macrosoft stock is selling for $140 per share on the expiration date. How much is your options investment worth? What if the terminal stock price is $125? Explain. c. Suppose you buy 10 contracts of the August 110 put option. What is your maximum gain? On the expiration date, Macrosoft is selling for $104 per share. How much is your options investment worth? What is your net gain? d. In part (c), suppose you sell 10 of the August 110 put contracts. What is your net gain or loss if Macrosoft is selling for $103 at expiration? For $132? What is the break-even price—that is, the terminal stock price that results in a zero profit? Calculating Payoffs Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114. Option and Strike Calls Puts NY Close Expiration Price Vol. Last Vol. Last Macrosoft February 110 85 7.60 40 0.60 March 110 61 8.80 22 1.55 May 110 22 10.25 11 2.85 August 110 3 13.05 3 4.70 a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring commissions? b. In part (a), suppose that Macrosoft stock is selling for $140 per share on the expiration date. How much is your options investment worth? What if the terminal stock price is $125? Explain. c. Suppose you buy 10 contracts of the August 110 put option. What is your maximum gain? On the expiration date, Macrosoft is selling for $104 per share. How much is your options investment worth? What is your net gain? d. In part (c), suppose you sell 10 of the August 110 put contracts. What is your net gain or loss if Macrosoft is selling for $103 at expiration? For $132? What is the break-even price—that is, the terminal stock price that results in a zero profit?Explanation / Answer
a) Total amount that will be paid to buy 10 contracts of the February 110 call option:-
= 10 * 7.60 * 100
= $ 7600
b) If Market price = $ 140 per share
Payoff = 100 Shares * 10 Contract * (140 - 110) = 100 * 10 * 30 = $ 30000
Return of investment = 30000 - 7600 = $ 22400
If Market price = $ 125 per share
Payoff = 100 Shares * 10 Contract * (125 - 110) = 100 * 10 * 15 = $ 15000
Return of investment = 15000 - 7600 = $ 7400
c) Suppose you buy 10 contracts of the August 110 put option:-
Cost of put option = 10 * 100 * 4.70 = $ 4700
The highest gain will occur on put option when the price of Macrosoft company stock come / decreased to $ 0. In such case, the option will generate payoff = 10 * 100 * (110 - 0) = $ 110000
The Maximum gain = 110000 - 4700 = $ 105300
On the expiration date, if Macrosoft is selling for $104 per share:-
Payoff = 100 Shares * 10 Contract * (110 - 104) = $ 6000
Return on Investment = 6000 - 4700 = $ 1300
d) Suppose you sell 10 of the August 110 put contracts. [ if Macrosoft is selling for $103 at expiration]:-
Net gain or (Loss) = 4700 - 100 * 10 * (110 - 103)
= 4700 - 7000
= $ (2300) [ $ 2300 loss will be incurred as the writer of put option].
Suppose you sell 10 of the August 110 put contracts. [ if Macrosoft is selling for $132 at expiration]:-
The writer will have gain /profit of $ 4700. In other words, writer of put option will take entire premium amount of $ 4700 with himself.
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