1. You buy a stock for $50 and simultaneously write a call with a strike price o
ID: 2815523 • Letter: 1
Question
1. You buy a stock for $50 and simultaneously write a call with a strike price of $51 and a premium of $0.50 per share. If the stock price falls to $48 per share, what is your per-share net profit? If you think net profit is negative, enter your answer using a number preceded by a minus sign. If you think net profit is positive, enter your answer as a number.
2. You buy a stock for $40 and simultaneously buy a put with a $40 strike price and a $1.00 premium and write a call with a $40 strike price and a $1.00 premium. What is your per-share net premium? If you think the net premium is negative, enter your answer using a number preceded by a minus sign. If you think the net premium is positive, enter your answer as a number.
Explanation / Answer
1. When we write a call, we have given the other party the right to demand payment if the stock price rises above the strike price. In this case, the price had fallen to $48 when the strike price was $51 and hence the call shall not be exercises.
However the person shall suffer a loss on the original share as price fell from $50 to $48.
Per share loss thus is $48-$50+%0.5
= - $ 1.5
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2. Per Share net premium = Premium received on Call written - Premium paid on Put bought
$1 - $1
= $0 (Ans)
Ans : The net premium is $0.
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