The following prices are available for call and put options on a stock priced at
ID: 2748649 • Letter: T
Question
The following prices are available for call and put options on a stock priced at $50. The Black-Scholes model was used to obtain the prices. Assume that each transaction consists of one contract (100 options) unless otherwise indicated. What is the intrinsic value of the June 55 put What is the intrinsic value of the March 55 call What is the time value of the June 50 put What is the time value of the March 45 call Consider a bull money spread using the March 45/50 calls. How much will the spread cost What is the maximum profit on the spread What is the maximum loss on the spread What is the profit if the stock price at expiration is $47 Consider a long straddle constructed using the June 50 options. What will the straddle cost What are the two breakeven stock prices at expiration What is the profit if the stock price at expiration is at $64.75 Suppose a put is added to the straddle. This overall transaction is called a strip. Determine the profit at expiration on the strip ifExplanation / Answer
1. The intrinsic value for a put option is equal to the strike price minus the underlying price
Intrinsic value = 55 - 50 = $5
2. The intrinsic value for a call option is equal to the underlying price minus the strike price;
Intrinsic value = 50 - 55 = -$5
3. An option's time value is equal to its premium (the cost of the option) minus its intrinsic value
Intrinsic value = 50 - 50 = 0
Time Value = 4.13 - 0 = $4.13
4. An option's time value is equal to its premium (the cost of the option) minus its intrinsic value
Intrinsic value = 50 - 45 = $5
Time Value = 6.84 - 5 = $1.84
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