e options... . Chegsg. Assignment 1 figure 2.10.jpg 850 270 pixels Refer to the
ID: 2814489 • Letter: E
Question
e options... . Chegsg. Assignment 1 figure 2.10.jpg 850 270 pixels Refer to the stock options on Apple in the Figure 2.10. Suppose you buy an October expiration call option on 100 shares with exercise price $100. a-1. If the stock price in October is $103, will you exercise your call? No a-2. What is the net profitloss on your position? (Negative value should be indicated by a minus sign.) Net Profit a-3. What is the rate of return on your position? (Round your answer to 2 decimal places.) Rate of return b-1. Would you exercise the call if you had bought the October call with the exercise price $997 Yes No b-2. What is the net profitvloss on your position? (Input the amount as a positive value.) (Click to select) b-3. What is the rate of return on your position? (Round your answer to 2 decimal places.) Rate of return c-1. What if you had bought an October put with an exercise price of $100 instead? Would you exercise the put at a stock price of $100? O Yes No c-2.What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)Explanation / Answer
Answer 1: YES
Call Options are agreement that gives the option buyer the right, but not the obligation to buy a stock at a specified price within a specific time period.
A Call option buyer exercise his rights when the underlying stock price is higher than the strike price.
Since the stock price ($103) is higher than the Strike price($100), the option buyer will exercise the Call.
Answer 2:
The formula to calculate the return = (Spot price - strike price) - option price
in October, the option price for strike price 100 = 2.62
The reurn = (103 - 100) - 2.62 = 0.38
To buy 100 shares, the return will be = 0.38 * 100 = 38
Total cost = Option price * no. of shares purchased = 2.62*100 = 262
One month return = 38/262 = 0.14%
Annual return = 0.14* 12 = 1.74%
Answer 3: Yes
for the same reason mentioned above. But in this case return will be negative. The option profits when the (Stock price - strike price) > Option premium. in that case, (100 - 95) <6.35. Therefore the return will be negative. Since it is a contract, if the option buyer does not exercise its rights, he has to pay the option price, which is 6.35, but if he exercises his contract, he has to pay only (100 - 95 -6.35) = 1.35
Answer 4:
Current strike price = 95
The call option price for strike price 95 = 6.35
The return will be = (100 - 95) - 6.35 = -1.35
Total loss = 1.35*100 = -135
Answer 5:
The total cost will be = option price * no. of stocks purchased= 6.35*100 = 635
The rate of return = - 135/635 = -0.21%
annual return = 0.21*12 = -2.55%
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