The market price of ZYX stock has been volatile and you expect that volatility t

Question

The market price of ZYX stock has been volatile and you expect that volatility to continue for a few weeks based on recent news. Due to this belief you decide to purchase calls and puts to manage your exposure. You purchase a one-month call option with a strike price of $25 and an option price of $1.30. You also purchase a one-month put option with a strike price of $25 and an option price of $0.50. What will be your total profit or loss on these option positions if the stock price is $26.0 on the day the options expire?

$100

Explanation / Answer

Answer: -$80

Call Strike Price 25 Call Option Premium 1.3 Stock Price on Exercise Date 26 SinceMarket Price is more than Strike Price Buyer of call will exercise the option Pay off receivable (26-25) 1 Premium Paid 1.3 Profit/(Loss) on Call option -0.3 Put Option Strike Price 25 Put Option Premium 0.5 Stock Price on Exercise Date 26 SinceMarket Price is more than Strike Price Buyer of put will not exercise the option Pay off receivable 0 Premium Paid 0.5 Profit/(Loss) on Put option -0.5 Total Loss on Options -0.8 Assume no of shares 100 Profit/ Loss -80

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