Use the option quote information shown here to answer the questions that follow.

Question

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $32.

Suppose you buy 15 contracts of the February 34 call option. How much will you pay, ignoring commissions?

Suppose you buy 15 contracts of the February 34 call option. Macrosoft stock is selling for $35 per share on the expiration date.

On the expiration date, Macrosoft is selling for $28 per share. How much is your options investment worth?

What is your net gain or loss if Macrosoft is selling for $30 at expiration? (Enter your answer as a positive value.)

What is your net gain or loss if Macrosoft is selling For $36 at expiration? (Enter your answer as a positive value.)

What is the break-even stock price? (Round your answer to 2 decimal places, (e.g., 32.16).)

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $32.

Explanation / Answer

a) The asked price is $0.73 /share for one call which controls 100 shares. So, for 15 contracts total expenditure would be: 15 contracts x $0.73/share x 100 shares/contract = $1095

b1) If the stock price at expiration is $35, then the payoff is: 15 contracts x 100 shares x [$35 - $34] = $1500

b2) If the stock price at expiration is $34, then the payoff is: 15 contracts x 100 shares x [$34 - $34] = $0

c1) The cost of the put options would be: 15 contracts x 100 shares x $2.60/share = $3900.

The maximum gain would occur on the put option if the price of Macrosoft stock dropped to $0.

In such a case, the options would generate a payoff of: 15 contracts x 100 shares x $34/share = $51000.

So, the maximum gain would be [net of the cost of the options]: $51000-$3900 = $ 47100.

c-2) If the stock price at expiration is $28, the position will have a profit of: Payoff = 15 x 100 x [$34-$28] = $9,000, Profit = $9,000 - $3900 = $5100

d-1) you sell 15 of the August 34 put contracts. That means you are the writer of the put option. And as the Macrosoft is selling for $30 at expiration, put is in the money that means the person purchasing the put option will make a profit, whereas as a writer you will suffer loss.

Your net loss

= put premium – loss on put

= $3900 – 15 contracts x 100 shares x ($34 - $30)/share

= $3900 - $6000

= ($2100)

d-2) When the share is selling at $36 at expiration, as a writer of the put, you will make a profit as put is out of the money [i.e., the purchaser of the put cannot make any money by putting the stock at $36], so you as the writer will pick up the entire put premium of $3900 in this case.

Your net profit

= put premium

= $3900

d-3)

At breakeven, you loss on the put would be exactly equal to the put premium.

15 x 100 x [$34 – ST] = $3900. Solving we get, ST = $31.40. For terminal stock prices above $31.40 the writer makes a profit (ignoring transactions costs and the effects of the time value of money).

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.