Question

Both a call and a put currently are traded on stock XYZ; both have strike prices of $44 and maturities of six months.

What will be the profit/loss to an investor in the following scenarios? (Loss amounts should be indicated by a minus sign. )

Part 1

An investor buys the call for $4.07 and the stock price in six months is $51.

Part 2

An investor buys the put for $7.24 and the stock price in six months is $50.

Answer 1

1. The profit or loss is computed as follows:

= Stock price in 6 months - Strike price - premium

= $ 51 - $ 44 - $ 4.07

= $ 2.93

2. The profit or loss is computed as follows:

= Strike price - Stock price in 6 months - premium

= $ 44 - $ 50 - $ 7.24

= - $ 13.24

But the maximum loss in case of a put option is restricted to the amount of premium paid which is shown below:

= - $ 7.24