Question

A call option on Company Goodtimes common stock is worth $7 with 5 months before expiration. The strike price on the call is $35 and the price per share is currently trading at $39 per share. The put option at the same exercise price is worth $1.50. a. Is the call option in or out or the money? b. Is the put option in or out of the money?c. If you bought both the put and call in 5. above and held them both to expiration, calculate your loss or profit on both the put and call if the price at expiration was $28 per share.

Answer 1

Option can be standardized in following manners -

	Call option	Put option
At the money	Exercise Price = Market Price	Exercise Price = Market Price
In the money	Exercise Price < Market Price	Exercise Price > Market Price
Out the money	Exercise Price > Market Price	Exercise Price < Market Price

a.

Call option Strike price (exercise price) = $35

Current trading price of underlying share = $39

Exercise Price of Call < Market Price , Thus above Call option is In the money

b.

Put option Strike price (exercise price) = $35

Current trading price of underlying share = $39

Exercise Price of Put < Market Price , Thus above Put option is Out the money

c.

Price of underlying share at expiry = $28

Profit or Loss of Call option = Max(Price of Share-Strike Price, 0) - Call Premium

= Max(28 - 35 , 0) -7

= -$7

Profit or Loss of Put option = Max(Strike Price - Price of Share, 0) - Put Premium

= Max(35 - 28 ,0) - 1.50

=7 - 1.50

= $5.5

Total Profit of Loss if both option held = 5.5 - 7 = -$1.5

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.