The market price of ABC stock has been very volatile and you think this volatili
ID: 2785391 • Letter: T
Question
The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.50. You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.70. What will be your total profit on these option positions if the stock price is $24.60 on the day the options expire?
You sold ten put option contracts on PLT stock with an exercise price of $31.20 and an option price of $1.20. Today, the option expires and the underlying stock is selling for $33 a share. Ignoring trading costs and taxes, what is your total profit on this investment?
Three months ago, you purchased a put option contract on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and taxes, what is your total profit on your investment?
Explanation / Answer
Put option
CF at expiration = MAX (strike price - underlying price, 0) - Option premium
Call Option
CF at expiration = MAX (underlying price - strike price, 0) - Option premium
1)
Call = MAX(24.6-25,0) - 1.5 = 0 - 1.5 = -1.5
Put = MAX(25 - 24.6,0) - 0.7= 0.4 - 0.7 = -0.3
Total Profit (Loss) = -1.5 -0.3 = -1.8 (Loss)
2)
As Strike price is lower, Option is out of money
Profit = 10*(0 + 1.2) = 12
3)
This is out of money option
Profit = -0.60 (Loss)
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