2. You are the writer of a put option on Apple Inc. common stock. The option has

Question

2. You are the writer of a put option on Apple Inc. common stock. The option has an exercise price of $122 and the stock is currently trading at $124.70. The option premium is $3.60 per contract.

a. What is your net profit/loss if Apple Inc. stock price increased to $126 and stays at that price until the option expires? (Show your calculations)

b. What is your net profit/loss on the option if Apple’s stock price decrease to $115 and the option holder exercises the option? (Show your calculations)

c. Below, graphically show your answers to parts (b) and (c) in the profit and loss diagram. In the graph be sure to add the exercise price (X), the payoff structure from the option, the profit/loss amount on the y-axis for parts (b) and (c).

Explanation / Answer

b.call option:exercise price(EP)=122; Selling price (SP)=126; premium = 3.60$

SP,< EP - out of money - lapse of option

loss=premium = 3.60$

put option: EP=122$; SP=115$; premium = 3.60$

SP<EP- in the money- exercise the option

gain=124.70-115-3.60=$6.1 gain

b. call option: EP= 122$, SP=126$

SP>EP- in the money Exercise the option

GAin= 126-124.70-3.60=-2.3$---loss

put option: EP= 122$ ; SP=126$

SP>EP- out of money-lapse the option

loss= premium= 3.60$

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