3. Calculating Payoffts Use the option quote information shown here to answer qu
ID: 2794038 • Letter: 3
Question
3. Calculating Payoffts Use the option quote information shown here to answer questions that follow. The stock is currently selling for S114. Option and NY Close NY Closed ExpirationPriceVol.at Vol. Last Calls Puts Expiration Macrosoft February110 85 7.60 40 60 March May August 110 110 110 61 8.80 22 1.55 22 10.25 11 285 3 13.05 3 4.70 pay, ignoring commissions? b. In part (a), suppose that Macrosoft stock is selling for $140 per share on the expiration date. How much is your options investment worth? What if the terminal stock price is $125? Explain c. Suppose you buy 10 contracts of the August 110 put option. What is your maximum gain? On the expiration date, Macrosoft is selling for $104 per share. How much is your options investment worth? What is your net gain? d. In part (c), suppose you sell 10 of the August 110 put contracts. What is your net gain or loss if Macrosoft is selling for $103 at expiration? For $132? What is the break- even price -that is, the terminal stock price that results in a zero profit?Explanation / Answer
(a). Feb. 110 call premium = $7.60
Total Pay on 10 Contracts = $7.60*10 = $76
(b). Investment Worth = Expiration Price - Strike Price
=$140-$110 = $30
10 Contract worth = $30*10 = $300
If terminal value = $125
Investment Worth = $125-$110 = $15
10 Contract worth = $15*10 = $150
(c). August 110 Put Purchase Premium = $4.70
Maximum Gain = Strike Price - Premium
=$110-$4.70 = $105.30
10 contracts maximum gain = $105.30*10 = $1053
Investment Worth = Strike Price - Expiration Price
=$110-$104
=$6
10 Contracts Investment Worth = $6*10 = $60
Net Gain on 10 Contracts = Investment Worth - Premium
=$60 - $4.70*10 = $13
(d). Net Loss = Strike Price - Expiration Price - Premium
=$110-$103-$4.70 = $2.30
10 Contracts Net Loss = $2.30*10 = $23
If Expiration price $132
Then it will be not exercised by buyer.
Net Gain for seller = Premium * 10
=$4.70*10 = $47
Break Even price for seller = Strike Price - Premium = $110-$4.70 = $105.30.
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