Use Chart for 1-6 Stock Strike Price Market Price Strike Price Market Price Pric

Question

Use Chart for 1-6
        Stock        Strike Price    Market Price        Strike Price          Market Price
        Prices        of Call               of call                of put                 of put
Ford $8.50    $7.50             $1.90                  $7.50                 $1.00

IBM    $95.50        $90.00           $9.50                  $90.00                $1.00

Kroger $28.25      $30.00            $1.10                  $30.00                $2.55

1) If you buy 100 shares of ford at the price given and 1 call contract (1 contract=100 shares), your out of pocket costs for both positions is:
(this can also be called going long the stock and long the call option).

2) If you buy 100 shares of IBM at the price given and 1 call contract (1 contract =100 shares), your out of pocket costs for both positions is:

3) If you buy 100 shares of IBM at the price given and sell 1 call contract (1 contract= 100 shares), your out of pocket costs for both positions is:

4)If you buy 100 shares of IBM at the price given and BUY 1 Put contract ( 1 contract=100 shares), your out of pocket costs for both positions is:

5)If you buy 1 Call contract on Ford at the price given and BUY 1 Put contract (1 contact=100 shares), your out of pocket costs for both positions is:

6) If you sold 1 Call contract on IBM at the price given and sold 1 Put contract (1 contract = 100 shares), your out of pocket costs for both positions is:
(This can also be called "going short the call and short the put option).

7) You buy one Ford Call at today's price. At the call's expiration, the stock is trading at $10 per share. What is your total profit (1 contract is based on 100 shares)?

8) You buy 1 put on Kroger; at expiration, Kroger is trading at $31 per share. What is the profit/loss of this option position?

9) Assume you can either buy IBM stock or one call on IBM at the prices quoted. Assume that at the option's expiration (actual date not given, but sometime in the future), IBM is trading at $105 per share. The holding period return is the ending value less beginning value divided by the beginning value. What is the % return from holding each position from today until the option expires?

10)For the Call on Ford stock, what is the exercise value (per share)?

11)For the call on IBM, what is the premium paid for the option (at this moment in time)?

12)For the call on Kroger, if it is purchased at the market price, how much of a price increase in the stock is needed to breakeven on the trade?

13)For the put on Ford, what is the premium paid for the option (at this moment in time)?

14)For the put on IBM, what is the break-even if you are long the stock and purchased the put at today's value?
(Long the stock means you own the stock (at today's price) and your purchas at put at today's price).

15) For the put on Kroger, that is the premium paid for the put option (at this moment in time)?
        Stock        Strike Price    Market Price        Strike Price          Market Price

Explanation / Answer

Option strike prices are referred to as in the money, at the money and out of the money. When the stock price is higher than the strike price, a call option is said to be in the money. In-the- Money Option: An in-the-money (ITM) option is an option that would lead to a positive cash flow to the holder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price. At-the-Money Option: An at-the-money (ATM) option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is at-the-money when the current index equals the strike price (i.e. spot price = strike price) Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negative cash flow if it were exercised immediately. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price (i.e. spot price Strike Price $7.50 Thus, the call option is in the money In the case of a put, the spot price is above the strike price. Here, Spot Price $8.50 > Strike Price $7.50. Thus, the call option is Out-of-the Money option. Out-of-the Money (or) Out-of-pocket cost for Put Option: 100 shares * $8.50 = $850 (Spot Price) 100 shares * $7.50 = $750 (Strike Price) Out-of-pocket cost for Put Option = [$850 - $750] Out-of-pocket cost for Put Option = $100 (2) Stock Price (Spot Price) of IBM = $95.50 1 Contract = 100 shares Spot Price = 100 shares * $95.50 = $9,550 Strike Price = 100 shares * $90.00 = $9,000 Here the spot price is greater than the strike price. Hence, there are no out-of-pocket costs for call option. Stock Price (Spot Price) of IBM for Put Option = $95.50 Spot Price of IBM for Put Option = 100 shares * $95.50 = $9,550 Strike Price of IBM for Put Option = 100 shares * $90.00 = $9,000 Here the Spot Price of Put Option is greater than the Strike Price. Hence, the Out-of-pocket costs for Put Option = [$9,550 - $9,000] Out-of-Pocket cost for Put Option = $550 (7) Call Option buying value of Ford = 100 shares * $8.50 = $850 At the time of call’s expiration, the stock is trading at $10 per share. So, the profit on call option is [$10 * 100 shares = $1,000] = [$1,000 - $850] = $150 Total Profit on Call Option of Ford = $150 (8) Put Option buying value of Kroger = 100 shares * $28.25 = $2,825 At the time of expiration, the stock is trading at $31 per share. So, the profit on Put Option is [$31 * 100 shares = $3,100] = [$3,100 - $2,825] = $275 Total Profit on Put Option of Kroger = $275 (9) At the time of option’s expiration the IBM is trading at $105 per share. The beginning value per share of IBM (Spot Price) = $95.50 % Return from holding each position from today until the option expires: [$105 - $95.50] / $95.50 = 9.95% (10) The exercise value (or) Strike value per share of Ford Call = $7.50 (11) Premium of the Option = [Intrinsic Value + Time Value] Intrinsic value is the difference between the exercise price of the option (strike price) and the current value of the underlying instrument (spot price). If the option does not have “positive monetary value”, i.e. finishes out-of-the money, its holder will simply “abandon the option” and it will expire worthless; the option will therefore never have a value less than zero. Intrinsic Value = [$90.00 - $95.50] = ($5.50) Intrinsic value of the options is the quantity of point’s in-the-money amount. Time value of the premium is the part of premium which is more than the intrinsic value of the option. Only options in-the-money have intrinsic value. Consequently, premium of the option will increase within the increase of points in-the-money. The more time is left till the expiration date of the option, the more is its time value.

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