1. The current stock price of ABC is $87. You have the following quotes on ABC o
ID: 2480981 • Letter: 1
Question
1. The current stock price of ABC is $87. You have the following quotes on ABC options: Expiration Exercise Price Calls Puts Feb 80 9.30 1.05 Feb 85 8.05 1.15 May 90 3.50 4.35 May 95 3.00 10.15 a) Which options are in the money? b) What is the exercise value of an ABC February call option with a strike price of $80? c) Suppose you buy 10 contracts of the February 85 call option. How much will you pay, ignoring commissions? d) In part (c) suppose that ABC stock is selling for $130 per share on the expiration date. How much is your option investment worth? What if the stock price is $70? e) Suppose you buy 10 contracts of the May 95 put option. What is the absolute maximum gain you could achieve?
Explanation / Answer
Option
Expiration
Exercise price
Calls
Puts
1
Feb
80
9.3
1.05
2
Feb
85
8.05
1.15
3
May
90
3.5
4.35
4
May
95
3
10.15
a)
An option is said to be in the money which when exercised immediately will give positive cash flow to the option holder
Spot Price=$87
Option 1: Call payoff=Max(87-80,0)=7;Put Payoff=Max(80-87,0)=0
Option 2: Call payoff=Max(87-85,0)=2;Put Payoff=Max(85-87,0)=0
Option 3: Call payoff=Max(87-90,0)=0;Put Payoff=Max(90-87,0)=3
Option 4: Call payoff=Max(87-95,0)=0;Put Payoff=Max(95-87,0)=8
Option 1 Call, Option 2 Call, Option 3 Put and Option 4 Put are in the money option
b)
Exercise value of ABC Feb call Option with strike price $80
Call payoff=Max(87-80,0)=7
c)
Price for 10 contracts of the February 85 call option=Preimum*10=8.05*10=$80.5
d)
Spot Price in Feb=$130
Thus Payoff =10*Max(130-85,0)=450
Net Profit=Payoff-Premium=450-80.5=369.5
For Spot=70
Payoff =10*Max(70-85,0)=0
Net Profit=Payoff-Premium=0-80.5=-80.5
e)
10 contracts of the May 95 put option.
Net Profit=10*(Max(95-Spot,0)-10.15)
Absolute maximum gain you could achieve when Spot falls to zero
Absolute maximum gain=10*(Max(95-0,0)-10.15)=848.5
Option
Expiration
Exercise price
Calls
Puts
1
Feb
80
9.3
1.05
2
Feb
85
8.05
1.15
3
May
90
3.5
4.35
4
May
95
3
10.15
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