The market price of Simpson Structures stock has been relatively volatile and yo

ID: 2698196 • Letter: T

Question

The market price of Simpson Structures stock has been relatively volatile and you think this

volatility will continue for a couple more months. Thus, you decide to purchase a two-month European

call option on this stock with a strike price of $32.50 and an option price of $1.80. You also purchase a

two-month European put option on the stock with a strike price of $32.50 and an option price of $.60.

What will your net proï¬t or loss on these option positions be if the stock price is $34.20 on the day the

options expire? Ignore trading costs and taxes.

Profit on call option = stock price -strike price - price of option = $34.2-$32.5-$1.8 = - $ 0.1

Since the stock price is greater than strike price, put option will not be excersised.

Loss on put option = price of option = $ 0.60

Total loss = Loss on call option + Loss on put option = $ 0.1+ $ 0.6 = $ 0.70

Net loss = $ 0.70

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