A call option on an S&P 500 futures contract has an exercise price of 1490; the

Question

A call option on an S&P 500 futures contract has an exercise price of 1490; the call premium is currently $6.50. On the same date, a put option on the S&P 500 futures contract has an exercise price of 1490; the put premium is currently $7.50. The two options have the same expiration date.

Assume that the S&P 500 index is 1485 at expiration:

A) Should the call option be exercised or should it be left to expire? What is the net ($) gain or loss after accounting for the premium paid to purchase the option?

B) Should the put option be exercised or should it be left to expire? What is the net ($) gain or loss after accounting for the premium paid to purchase the option?

Explanation / Answer

Call Option- Call option gives its owner (holder) the right to buy a stock at a specified price on or before the expiry date.

Put Option- Put option gives the owner (holder) the right to sell the shares at a specified price on or before the expiry date.

Option seller (write) has no right but it has obligation to buy/ sell the shares if option buyer exercise the option. Thus for granting a right to buyer and accepting an obligation seller charge a premium.

Exercise of option is depends upon market price of underlying stock at expiration date.

(

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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