Original Price AAPL: $520 Due Monday 11/20/2017 Finance 421 (Towner) Homework 6

Question

Original Price AAPL: $520

Due Monday 11/20/2017 Finance 421 (Towner) Homework 6 share price decreases by 10% between now and December 21st. (c) Assuming AAPL's compute the payoff, profit, and return for each of the following positions (i) A long position in 100 call options, bought at $26.50 per call. (ii) A long position in 100 put options, bought at $13.30 per put. As a reminder, the payoff from an options position is the value of the option at expiration ignoring the premium paid), the profit is the payoff minus the premium, and the return equals the profit divided by the initial premium. Payoff Profit Return Position Long 100 call options Long 100 put options

Explanation / Answer

Formula sheet

A B C D E F G H I J K 2 3 Call option gives option buyer the right to by the Stock at a strike price at a specified time in future. 4 5 Payoff of Call option is given by following equation: 6 Payoff of Call option = Max(ST-X,0) 7 where ST is stock price at maturity and X is exercise price. 8 9 Profit of Call option is given by following equation: 10 Profit of Call option = Max(ST-X,0) -c 11 where ST is stock price at maturity, X is exercise price and c is premium paid to buy the Call option. 12 13 Put option gives option buyer the right to sell the Stock at a strike price. 14 15 Payoff of put option is given by following equation: 16 Payoff of put option = Max(X-ST,0) 17 where ST is stock price at maturity and X is exercise price. 18 19 Profit of put option is given by following equation: 20 Profit of put option = Max(X-ST,0)-p 21 where ST is stock price at maturity, X is exercise price and p is premium paid to buy the put option. 22 23 Return can be calculated as: 24 Return =Profit /Premium paid 25 26 27 Original Price $520 28 Exercise Price of Call Option $550 (Assumed as it is not given) 29 Exercise Price of Put Option $550 (Assumed as it is not given) 30 Premium of Call Option $26.50 31 Premium of Put Option $13.30 32 Number of Call Option 100 33 Number of Put Option 100 34 35 Change in price -10% 36 37 Price at maturity =Original Price*(1+% change) 38 468 39 40 Position Payoff Profit Return 41 Long 100 Call options $0 ($2,650.00) -100% 42 Long 100 put options $55,000 $53,670.00 4035% 43

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