You are given the following: Price of the Stock $18.00 Price of the 3 month Call

Question

You are given the following: Price of the Stock $18.00 Price of the 3 month Call @ $20 2 Price of the 3 month Call @ $15 5 a) What is the profit (loss) at the expiration date of the options if the price of the stock is $14, $20, or $25 and if the investor buys the option with the $20 strike price and sells the other option? b) Compare the profit (loss) from this strategy with shorting the stock at $18. c) What is the profit (loss) at the expiration date of the options if the price of the stock is $14, $20, or $25 and if the investor buys the option with the $15 strike price and sells the other option? d) Compare the profit (loss) from this strategy with buying the stock at $18.

Explanation / Answer

If the price is $14 à Not exercised à Loss of $2, the premium paid.

If the price is $20 à ($20-$20)-$2 à -$2, the premium paid.

If the price is $25 à ($25-$20)-$2 à $3.

b) shorting $18:

at price 14 (18-14)-2 = $2 profit

at price 20 and 25 loss of premium paid $-2

c)

If the price is $14 à Not exercised à Loss of $2, the premium paid.

If the price is $20 à ($20-$15)-$2premium paid = $ 3 profit,

If the price is $25 à ($25-$15)-$2 à $8 profit.

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