Suppose that you sell CDT short at $23 and at the same time you write a cal opti

Question

Suppose that you sell CDT short at $23 and at the same time you write a cal option on CDT with a strike price of $22 and a premium of $2. What is the combined profit or loss on the two poeitions together if just prior to expiration of the call option the price of COT is $23? Assune that you cover your short position (meaning you get rid of the short position) just prior to the time of option expiration. a $o b. $1 d. ($2) QUESTION 5 You buay a put option on a stock for a premium of $1. The exercise price is $10.00. What is the option's profit or lossif just prior to expiration the stock price is $9.007 Oa($1.00) b.$1.00 Od. $0.50 QUESTION 6 You write a put on Kane with an exercise price of $3.50 and a premium of $1.75. At the same time you buy a call on Kane with an exercise price also at $3.50 and a premium of $1.25. Caloulate the profit or loss on both positions simultaneously if just prior to option expiration Kane's stock price is $3.00 a. ($1.25) b.($0.50) c.($0.75) Od. $0.00 e ($1.75)

Explanation / Answer

1st question

Short position is covered, so there is no profit/loss for selling CDT short at $23.

Premium earned by writing a call option = $2

Market Price of CDT prior to contract expiration = $23 & Strike Price = $22

So, option will be excercised.

Loss from option = Market Price of Underlying - Strike Price = 23 - 22 = $1

So, total profit = Premium earned - loss from option = 2 - 1 = $1

2nd question

Premium paid buying Put option = $1

Stock price prior to expiration = $9 & Exercise Price = $10

So, Put option will be exercised.

Gain from put option = 10 - 9 = $1

Total gain = Gain from put option - Premium paid for option premium = 1 - 1 = $0.0

3rd question

Writing a Put:

Premium earned = $1.75

Stock price prior to expiration = $3.00 & Exercise Price = $3.50

Put will be exercised.

Loss from put option = 3.50 - 3.00 = $0.50

Total profit from put option = Premium earned - Loss from put = 1.75 - 0.50 = $1.25

Buying a Call:

Premium paid = $1.25

Stock price prior to expiration = $3.00 & Exercise Price = $3.50

Call will not be exercised.

Total loss from call option = Premium paid = $1.25

So, total profit = Profit from Put - Loss from Call = 1.25 - 1.25 = $0.00

* Call options get exercised if Market Price > Strike Price & Put options get exercised if Market Price < Strike Price

*Buyer of a Call has a right to buy and writer of a call has an obligation to sell.

*Buyer of a Put has a right to sell and writer of a put has an obligation to buy.

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