Both a call and a put currently are traded on stock XYZ; both have strike prices

Question

Both a call and a put currently are traded on stock XYZ; both have strike prices of $45 and expirations of 6 months.

a. What will be the profit to an investor who buys the call 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.)

b. What will be the profit to an investor who buys the put for $7.5 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.)

If you could give step by step instructions that would be great.....Thanks!

Explanation / Answer

A] Bought a call for $ 5.

Call option gives him the choice to buy it at $ 45. Hence, he will only sell it if the stock price becomes >= 45

Profit = max (Stock price in 6 months - Strikeprice - Cost of option, -Cost of Option)

a) Loss of $ 5.0

b) Loss of $ 5.0

c) No profit or loss

d) Profit of $ 5.0

e) Profit of $ 10.0

B]

Put option gives him the choice to sell it at $ 45. Hence, he will only sell it at 45 if the stock price becomes <= 45

Profit = max (Strikeprice - Stock price in 6 months - Cost of option, -Cost of Option)

a) Loss of $ 2.5

b), c), d), e) Loss of $ 7.5

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