The market price of Southern Press stock has been relatively volatile and you th
ID: 2788581 • Letter: T
Question
The market price of Southern Press stock has been relatively volatile and you think this volatility will continue for a couple more months. Thus, you decide to purchase a two-month European call option on this stock with a strike price of $45 and an option price of $3. You also purchase a two-month European put option on the stock with a strike price of $45 and an option price of $0.66.
What will be your total net profit or loss on these option positions if the stock price is $47.74 on the day the options expire? Ignore trading costs and taxes.
Explanation / Answer
Call option is excercised because strike price is less than the spot price on expiry date, hence bought at a lesser price of 45, can be sold immediately for 47.44
Put option will not be excercised because on the spot security can be sold for 47.44 instead of using option to sell it for 45.
These two positions will give a net loss of 1.58
Option Strike price Premium No of options Total premium Spot price on expiry Exercise Option Value Net profit a b c d=c*b e f= e-a g= f-d Call option 45 3 1 3 47.74 yes 2.74 -0.26 Put option 45 0.66 2 1.32 47.74 No 0 -1.32 net profit/(loss) -1.58Related Questions
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