Problem 2-20 Both a call and a put currently are traded on stock XYZ; both have

Question

Problem 2-20

Both a call and a put currently are traded on stock XYZ; both have strike prices of $60 and expirations of 6 months.

What will be the profit to an investor who buys the call for $4.8 in the following scenarios for stock prices in 6 months? (a) $40; (b) $45; (c) $50; (d) $55; (e) $60. (Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place. Omit the "$" sign in your response.)

What will be the profit to an investor who buys the put for $5 in the following scenarios for stock prices in 6 months? (a) $40; (b) $45; (c) $50; (d) $55; (e) $60. (Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place. Omit the "$" sign in your response.)

Both a call and a put currently are traded on stock XYZ; both have strike prices of $60 and expirations of 6 months.

Explanation / Answer

a)

Payoff on option is any stock price value greater than the strike price. Since stock is not more than $60, in all cases payoff shall be zero.

b)

For put option any stock price below $60 shall be a positive payoff. Deducting the option cost shall give us the profit.

Stock price Option cost Payoff Profit $   40.00 $    4.80 $        -   $ -4.80 $   45.00 $    4.80 $        -   $   -4.80 $   50.00 $    4.80 $        -   $   -4.80 $   55.00 $    4.80 $        -   $   -4.80 $   60.00 $    4.80 $        -   $   -4.80

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