with put and call options. 2. What factors could affect the premium paid on a pu
ID: 2789193 • Letter: W
Question
with put and call options. 2. What factors could affect the premium paid on a put option? Describe how each factor affects the size of the premi um 3. A cal option on FDX stock specifies a strike price of S180. Today's price of the stock is S174. The premium on the call option is $5. What price does FDX stock have to reach in order to break even assuming no transaction costs? 4. Compared to the FDX call option above with another FDX call option withan exercise price of S190 and a premium of S1. What might an investor who prefers the $190 strike, S1 call option expect compared to an investor who prefers the $180 strike price, S5 option? Which one would be able to leverage capital more to take advantage of the stock moving to $200 based on some extremely good news about FDX?Explanation / Answer
Answer 1) a) A Call Option gives the buyer the right but not the obligation to buy the underlying security at the exercise price. A Put Option gives the buyer the right but not the obligation to sell the underlying security at the exercise price.
b)A call option allows buying option, whereas Put option allows selling option.
c) The call generates money when the value of the underlying asset goes up while Put makes money when the value of securities is falling.
d)The potential gain in case of a call option is unlimited, but such gain is limited in the put option.
e)In the call option, the investor looks for the rise in prices of the security. Conversely, in the put option the investor expects stock prices to go down.
Anser 2) The greater the volatility of the underlying stock price ,higher the premium .The higher the stock's existing price relative to the excercise price,the higher the premium.The longer the term to the expiration date ,the higher the premium.
Answer 3) Srike Price at call option=$ 180
Current Price of Stock =$174
Premium on the Call option=$ 5
Profit= $ 180-174-5= $ 1 Profit
So Break Even Price= $ 174+5= $ 179
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