1. The bid price for a 45 strike price call to be $4.70 and the ask price to be
ID: 2815628 • Letter: 1
Question
1. The bid price for a 45 strike price call to be $4.70 and the ask price to be $4.90. You choose to purchase, go long, the call. What will be the profit on the call at expiration, a. if the price of the stock is $50.00? ___________ b. if the price of the stock is $45.00?
2. The bid price for a 50 strike price put to be $2.51 and the ask price to be $2.62. You choose to sell, go short, the put. What will be the profit on the put at expiration,
if the price of the stock is $45? ____________
if the price of the stock is $50?
3. You decide to buy a call option with a strike price of 105 and a put option with a strike price of 95 on the same stock. Both options have the same maturity. The call costs $1.30 and the put costs $4.80. What will be your profit at expiration if the stock price is
$102? ____________
$85? ____________
$110? ____________
What are the break-even points?
Explanation / Answer
1.a. Profit at$ 50 = 50-45-4.9 = 0.1$ (Ans)
Note : The call was exercised as the underlying price was greater than the strike price.
1.b Profit = 0- 4.9$ = -4.9$ (Ans)
The loss is of $4.9. It is indifferent to exercise the call as the price is same as exercise price.
2. At $45 price at expiration, put shall be exercised. However as we had shorted the put, it will be additional loss.
Total Loss : $(50-45-2.51)
Loss of $2.49 (Ans)
At $50 price to expiration, as the price is same as exercise price it is indifferent if the call is exiercised or not. Thus premium Income shall be the gain.
Gain = $2.51 (Ans)
3.
If price is $102, both call and put shall not be exercised. (As the price at expiration is lower than the call exercise price and higher than the put exercise price). Loss shall be the premium paid which is $1.3+4.8 = $6.1
Ans: If the price at expiration is $102, there is a loss of $ 6.1
If price is $85 at expiration, only put is exercised. The Net profit/ LOss is :
$(95-85) - (1.3+4.8)
=$3.9 (Ans)
Ans : If the price at expiration is $85, there is a profit of $3.9.
If the price at expiration is $110, only call is exercised.
Net Profit / Loss is :
$(110-105) - (1.3+4.8)
= Loss of $ 1.1
Ans : There is a loss of $1.1 if the price at expiration is $110.
Total premium paid is $1.3+4.8 = $ 6.1.
Put will give equivalent profit from put only if price falls till : $95-6.1 = $88.9
Call will give equivalent profit from call only if price rises till $105+6.1 = $111.1
Thus, The breakever points are $88.9 on the lower side and $111.1 on the upper side. If the price at expiration is below $88.9 or above $ 111.1, the investor will make profit. When the price at expiration is between $88.9 and $111.1 , the investor will end up making loss.
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