1. The current stock price of ABC is $87. You have the following quotes on ABC o
ID: 2720957 • Letter: 1
Question
1. The current stock price of ABC is $87. You have the following quotes on ABC options:
Expiration
Exercise
Price
Calls
Puts
Feb
80
9.30
1.05
Feb
85
8.05
1.15
May
90
3.50
4.35
May
95
3.00
10.15
a) Which options are in the money?
b) What is the exercise value of an ABC February call option with a strike price of $80?
c) Suppose you buy 10 contracts of the February 85 call option. How much will you pay, ignoring commissions?
d) In part (c) suppose that ABC stock is selling for $130 per share on the expiration date. How much is your option investment worth? What if the stock price is $70?
e) Suppose you buy 10 contracts of the May 95 put option. What is the absolute maximum gain you could achieve?
Expiration
Exercise
Price
Calls
Puts
Feb
80
9.30
1.05
Feb
85
8.05
1.15
May
90
3.50
4.35
May
95
3.00
10.15
Explanation / Answer
a)
Expiry
Call
Put
Feb
80
ITM
Feb
85
ITM
May
90
ITM
May
95
ITM
For call options if Strike price <Market Price then the call is ITM
for put option if strike price > Market price then put is ITM
b)Excercise value=87-80=7
c) Lot size * premium=10*8.05=80.5
d)Investment worth@130=(130-8.05)*10=1219.5
Investment worth@70 the call option will not be exercised hence premium paid is the worth=(-8.05*10)=(-80.5)
e)Maximum gain in put option is achieved when the exercise price is zero hence gain = (strike price-exercise price-premium paid)*contracts=(95-0-10.15)*10=848.5
Expiry
Call
Put
Feb
80
ITM
Feb
85
ITM
May
90
ITM
May
95
ITM
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