ABC Corp. is selling on NASDAQ at 25.50. You think that Obama will solve the \"F
ID: 2730428 • Letter: A
Question
ABC Corp. is selling on NASDAQ at 25.50. You think that Obama will solve the "Fiscal Cliff" problem and that the price of the stock will go to 40 3/4. lf option premiums are 5 1/2%, which BASIC option would you buy to make money ? (Show calculations!) XYZ Corp. is selling at 25.50. You think that Obama will solve the "Fiscal Cliff" problem and that the price of the stock will fall to 12 4/14. If option premiums are at 9.655%, which BASIC option would you buy to make money, assuming your prediction comes true ? (Show calculations!) P_cs = 71 1/7; you predict P_cs will go to 99.99. With option premiums at 8 1/2%, Which option will make you the MOST money, assuming you are right? You have absolutely NO CLUE which way the market will turn after the "Fiscal Cliff starts. The price of this stock could fall to 57 1/4. Which option would be the most logical to buy to protect yourself whichever way things turn out ?(Show calculations !) A stock price is $10.00, and you think it will go up to $13.00. Which option would you buy to make the most money and return? Show calculations if the premium for the option is 12%. A stock price is $10.00, and you think the price will fall to $6.50. Which of the 5 options would you buy to make any money at all ? Assume that all options cost the same - -10% premium.Explanation / Answer
When you expect the prices to go up, buying a “Call Option” will result into profits. So, you will buy a “Call option” with strike price of 25.5, which will turn into below calculated profits.
Spot Price of underlying = 25.50
Option Premium = 5.5% x 25.50 = 1.4025
Price after rise = 40.75
Gain from option = 40.75 - 25.50 - 1.4025 = 13.8475
2. When you expect the prices to go down, buying a “Put Option” will result into profits. So, you will buy a “Put option” with strike price of 25.5, which will turn into below calculated profits.
Spot Price of underlying = 25.50
Option Premium = 9.655% x 25.50 = 1.67025
Price after fall = 12.28571
Gain from option = 25.50 - 1.67025 - 12.28571 = 11.54404
3.A) As prices are expected to go up, you should buy a “Call Option”. Calculations are shown below:
Spot Price = 71.142857
Option Premium = 8.5% x 71.142857 = 6.047143
Price after rise = 99.99
Gain from option = 99.99 – 71.142857 – 6.047143 = 22.80
4.As the prices are expected to go up, you will buy “Call Option”
Spot Price = $10
Option Premium = 12% x $10 = $1.2
Price after rise = $13
Gain from option = $13 – $10 – $1.2 = $1.8
5.As the prices are expected to go down, you will buy a “Put Option”
Spot Price = $10
Option Premium = 10% x $10 = $1
Price after fall = $6.5
Gain from option = $10 – $6.5 – $1 = $2.5
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