Question

You bought a call option on July 27, 2020 at the exercise price of $65. It expires on October 26, 2020. The stock currently sells for $66., while the call option sells for $6.

a) What is the intrinsic value of the call? What is the time premium paid for the call?

b) What will the value of this call be after expiration if the price of the stock is $99, $65, $99, and $80, respectively?

c) If the price of the stock rises to $80 at the expiration date of the call, what is the percentage increase in the value of the call? Does this example illustrate favorable leverage?

d) If an individual opens a covered call position on this stock, what is the net cost and what will the profit on the position be at the expiration of this position if the price of the stock is $49, $52, $59, $65, $66, $69, and $80, respectively?

e) If an individual sells this call naked, what will the profit or loss be on the position after six months if the price of the stock is $59, $66, and $80, respectively?

Answer 1

a) Intrinsic value of call = stock price - exercise price = 66 -65 = 1

premium paid on the call = 6

b) The value of the call will be stock price - exercise price

Price of stock	Value of call
99	34
65	0
99	34
80	15

c)  

value of call at 80 = 80-65 =15

percentage increase in call = ( 15 -1 ) / 1 = 1400%

d)

Covered call means buying a stock and selling call option on the same stock

Price of stock (a)	Purhase price of the stock (b)	Premium from call option (c )	Net cost (d=b-c)	Sale price of stock (e )	Payoff from call option (f = Max ( S - 65,0)	Total Payoff (g = e +f)	Profit / Loss on position (h = g-f)
49	66	6	60	49	0	49	-11
52	66	6	60	52	0	52	-8
59	66	6	60	59	0	59	-1
65	66	6	60	65	0	65	5
66	66	6	60	66	-1	65	5
69	66	6	60	69	-4	65	5
80	66	6	60	80	-15	65	5

d.

Exercise price	Payoff b=[ Max( stock price - exercise price,0)]	Premium	Profit = Premium - payoff
65	0	6	6
65	1	6	5
65	15	6	-9