Answer the questions given the following information: price of a stock $52 strik
ID: 2754857 • Letter: A
Question
Answer the questions given the following information:
price of a stock $52
strike price of a three-month call $50
market price of the call $4
Is the call “out” of the money?
What is the time premium paid for the call?
What is the maximum possible loss from buying the call? unlimited
What is the maximum profit the buyer of the call can earn? unlimited
What price of the stock will assure that the buyer of the call will not sustain a loss?
If an investor sells the call covered, what is the cash inflow or cash outflow?
After three months the price of the stock is $53
What is the profit or loss from buying the call?
What is the profit or loss from selling the call naked?
Explanation / Answer
Is the call “out” of the money?
Yes , as the price of stock is $52 and stricke price is $50, it cannot be exercised if same price of $ 52 is on the exercise date
What is the time premium paid for the call?
market price of call = $ 4
intrinsic value = (52-50) = $2
time vale = ( 4-2) = $2
What is the maximum possible loss from buying the call?
maximum possible loss is the premium paid for call
What is the maximum profit the buyer of the call can earn?
maximum possible profit = 50-4
= $ 46
What price of the stock will assure that the buyer of the call will not sustain a loss?
= strike price - premium for call
= 50 - 4
= $ 46
If an investor sells the call covered, what is the cash inflow or cash outflow?
Call cover means
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.
cash inflow = $ 4
Out flow = $-4
After three months the price of the stock is $53
What is the profit or loss from buying the call?
call option is not exercised because the market pric is more than the strike price
and loss is $4
What is the profit or loss from selling the call naked?
An options strategy in which an investor writes (sells) call options on the open market without owning the underlying security. This stands in contrast to a covered call strategy, where the investor owns the security shares that are eligible to be exercised under the options contract.
This strategy is sometimes referred to as an "uncovered call" or a "short call".
profit is the premium of call $ 4
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