The current stock price of ABC is $87. You have the following quotes on ABC opti

Question

The current stock price of ABC is $87. You have the following quotes on ABC options 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?

Explanation / Answer

Answer A)-

ITM-For a call option, when the option's strike price is below the market price of the underlying asset. ... For a put option, when the strike price is above the market price of the underlying asset

b) 87-85=2

c)10*8.05=80.5

d) at price 130 investment worth=130*10-8.05*10=1219.5

at price 70 the call will not be exercised hence investment worth=-8.05*10=(-80.5)

e) Maximum gain is achieved when excercise price becomes zero

(Strike-excercise price-premium)*lots= (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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