Need the solution of all the parts with formulas Amy owns 100 shares (1 round lo
ID: 381565 • Letter: N
Question
Need the solution of all the parts with formulas
Amy owns 100 shares (1 round lot) of ABC stock with a cost basis of $35 a share. The stock is currently trading at $54 a share. Amy believes the price of ABC stock will fall to $45 a share in the near future but over the longer term of 3 to 5 years, increase in value to $75 a share. Amy would like to benefit from the expected near-term decline if it occurs. Therefore, Amy writes a call covered (= not naked) at a strike price of $55 and a premium of $2.
(a) How will the call help Amy profit if the expected price decline occurs? Explain What would be her total profits? Show all calculations.
(b) What is the maximum loss Amy can incur from the call? Explain What would be her total profits? Show all calculations.
(c) What is the maximum profit Amy can incur from the call? Explain.
Explanation / Answer
a). amy purchased 100 shares at $35 per share.
therefore cost of shares for Amy = $3500
premium recieved by Amy by selling call option of strike price $55= $2 *100 = $200
If stock price falls to $45/ share then premium of the call option will be zero therefore amy will gain $200 from this call option .
However Amy owns 100 Shares at $35 , Therefore she will get a profit of $1000 from these shares.
ANSWER : Her total profit in case a = $1200
B) If stock price reaches $75 , then price of call option of strike price $55 will be $20
however Amy have received $2 by selling this option.
therefore loss of Amy in this call option will be $75-$55= $20 - $2 = $18*100 = $1800
the profit per share foramy at expiry of $75 per share = 40*100= $4000
Answer : Net profit in case B = $(4000-1800)=$2200
C) maximum gain amy can receive from this call option = $2*100=$200
A option writer has the limit of profit upto the extent of the premium at which the option has been written by the option writer.
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