1. The price of a four-month GE call option with an exercise price of $35 is $6.

Question

1. The price of a four-month GE call option with an exercise price of $35 is $6. The current price of GE stock is $40 per share. The call holder exercises the call at expiration when the price of GE stock is $43. What is the payoff to the call holder?(Each contract is for 100 shares of stock)

A) $200

B) $300

C) $500

D) $800

2. Suppose that an investor believes the price of CNA stock, which is currently $50 per share, will increase substantially in the next six months. Six-month CNA call options with an exercise price of $50 are selling at a premium of $5. The investor has $5,000 to invest. Which one of the following strategies would be most profitable if the investor's expectations are accurate?

A) Invest $5,000 in CNA stock

B) Invest $5,000 in CNA stock and write covered calls

C) Invest $5,000 in six-month CNA calls

D) Invest $2,500 in CNA stock and $2,500 in six-month CNA calls

3. A three-month HP put option with an exercise price of $60 sells for a premium of $8. The put is in the money only if the price of HP stock is ______________.

A) greater than $68 per share

B) greater than $60 per share

C) less than $60 per share

D) less than $52 per share

4. The price of a two-month AT&T put option with an exercise price of $45 is $7. The current price of AT&T stock is $40 per share. The put holder exercises the put at expiration when the price of AT&T stock is $35. What is the profit per share to the put holder?

A) $2

B) $3

C) $10

D) $12

5. You just purchased a three-month BP call option (exercise price $75) and a three-month BP put option (exercise price $75). The call premium is $6 and the put premium is $2. Your maximum potential loss from this position is ______________. (Assume each contract is for 100 shares of stock)

A) $200

B) $600

C) $800

D) unlimited

Explanation / Answer

1) D. Payoff = 100 x (43 - 35) = 800 and Profit = 800 - 100 x 6 = 200.

2) C. Invest in call option as it would lead to more profits than the stock itself.

3) C. Put option payoff when the stock is below the exercise price. The option is in the money when the price is below the exercise price.

4) B. Profit = 45 - 35 - 7 = 3

5) C. Max Loss = 100 x (6 + 2) = 800 when the stock price is 75.

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