Use the option quote information shown below to answer the questions that follow

Question

Use the option quote information shown below to answer the questions that follow. The stock is currently selling for $30.

a. Suppose you buy 13 contracts of the February 31 call option. How much will you pay, ignoring commissions? (Do not round intermediate calculations.)

Cost           $

Suppose you buy 13 contracts of the February 31 call option and Macrosoft stock is selling for $33 per share on the expiration date.

b-1. How much is your options investment worth? (Do not round intermediate calculations.)

Payoff           $

b-2. What if the terminal stock price is $32? (Do not round intermediate calculations.)

Payoff           $

Suppose you buy 13 contracts of the August 31 put option.

c-1. What is your maximum potential gain? (Do not round intermediate calculations.)

Maximum gain           $

c-2. On the expiration date, Macrosoft is selling for $26 per share. How much is your options investment worth? (Do not round intermediate calculations.)

Position value           $

c-3. On the expiration date, Macrosoft is selling for $26 per share. What is your net gain? (Do not round intermediate calculations.)

Net gain           $

Suppose you sell 13 of the August 31 put contracts.

d-1. What is your net gain or loss if Macrosoft is selling for $28 at expiration? (Input your answer as a positive value. Do not round intermediate calculations.)

(Click to select)GainLoss            $

d-2. What is your net gain or loss if Macrosoft is selling for $34 at expiration? (Input your answer as a positive value. Do not round intermediate calculations.)

(Click to select)LossGain            $

d-3. What is the break-even price, that is, the terminal stock price that results in zero profit? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Break-even           $

Option and Calls Puts NY Close Expiration Strike Price Vol. Last Vol. Last Macrosoft February 31 88 .53 43 1.53 March 31 64 .77 25 1.94 May 31 25 1.05 14 2.36 August 31 6 1.26 6 2.40

Explanation / Answer

a The asked price of one call is $ 0.53 which controls 100 shares of Macrosoft stock So for 13 contracts the total expensiture would be 13 contracts * 100 shares *0.53 $689 Cost $689 b-1 Suppose you buy 13 contracts of the February 31 call option and Macrosoft stock is selling for $33 per share on the expiration date. Investment worth ? If the stock price at expiration is $ 33, than payoff would be 13*100*(33-31) 2600 The investment return would be 2600-689 $1,911 b-2 Terminal stock price is $ 32 if the stock price at expiration is $ 32, than payoff would be 13*100*(32-31) 1300 The investment return would be (1300-689) $611 c-1 Suppose you buy 13 contracts of the August 31 put option. Maximum Gain ? The cost of put options would be 13*100*2.40 3120 Maximum gain would occur on the put option of price of Macrosoft stock dropped to $ 0 The options would than generate a payoff of (13*100*31) 40300 Maximum gain would be 40300-3120 $37,180 If macrosoft is selling for $ 26 c-2 Payoff =13*100*(31-26) $6,500 c-3 Profit = 6500-3120 $3,380 d-1 Suppose you sell 13 of the August 31 put contracts. What is your net gain or loss if Macrosoft is selling for $28 at expiration? At a stock price of $ 28 the put is in the money which means that the put option can be exercised at a profit Net Loss = $3120 - (13*100*(31-28)) Put premium - loss on the put 3120 Net Loss = - $780 3900 -780 d-2 What is your net gain or loss if Macrosoft is selling for $34 at expiration? At a stock price of $ 34 the put is out of the money so the writer would pick up the entire put premium of $ 3120 d-3 13*100(31-St) = $ 3120 40300 - 3120 = 1300 St St = $ 28.60 Break even $28.60 For terminal stock prices above $ 28.60 makes a profit

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