Question

Assume it's October 3, 2019. Apple stock (AAPL) is selling for $218.96 per share. Using the option prices provided earlier in this lesson, provide analysis to answer the following four questions:

Calls	Last Sale	Open Interest	Puts	Last Sale	Open Interest
19 Oct 210.00	11.45	31092	19 Oct 210.00	2.1	36026
19 Oct 220.00	4.8	24085	19 Oct 220.00	5.4	14438
19 Oct 230.00	1.12	20544	19 Oct 230.00	11.75	1074
19 Nov 210.00	15.09	6009	19 Nov 210.00	6.05	11184
19 Nov 220.00	9	9983	19 Nov 220.00	10	6698
19 Nov 230.00	4.6	21252	19 Nov 230.00	15.62	1168
19 Dec 210.00	17.5	2265	19 Dec 210.00	8.05	3432
19 Dec 220.00	11.25	13770	19 Dec 220.00	12	5393
19 Dec 230.00	6.67	8195	19 Dec 230.00	17.32	861
20 Jan 210.00	18.92	38900	20 Jan 210.00	9.35	21722
20 Jan 220.00	12.97	29019	20 Jan 220.00	13.45	7828
20 Jan 230.00	8.3	31754	20 Jan 230.00	18.5	4497
20 Jun 210.00	26.25	3226	20 Jun 210.00	16.4	2841
20 Jun 220.00	20.37	11427	20 Jun 220.00	20.35	4768
20 Jun 230.00	15.85	4721	20 Jun 230.00	25.95	469

1.Focus on the January 230 call. Suppose you bought this call at the price indicated. How high must AAPL's price rise at expiration to break even on this option? 2. Now, look at the January 220 put. Provide a table showing the profit at expiration to a put buyer across a range of stock prices from $190 to $235 in $5 increments. 3.Assume you own 100 shares of AAPL stock (at $218.96 per share). Use the December 210 put to develop a protective put strategy. How will this strategy protect your position in AAPL if the stock price falls to $190? What if the price rises to $240?Calculate the net profit generated by the stock and the put at these prices and assuming they occur at the time of the option's expiration. 4.Create a strangle by buying the November 230 call and the November 210 put. What's the maximum loss for this position and what range of stock prices will produce it? Where will you break even? Why would an investor establish a position like this?

Answer 1

1. Break even price of call option = strike price + premium = $230+$8.3 = $238.30

2. The table is as given below

Stock price	Profit
at expiration	MAX(K-St,10-premium)
190	16.55
195	11.55
200	6.55
205	1.55
210	-3.45
215	-8.45
220	-13.45
225	-13.45
230	-13.45
235	-13.45

3. The profit generated per share under the two scenarios is given below

Stock price	Profit from Stock	Profit from Put	Total profit
at expiration	St-218.96	MAX(K-St,0)-premium
190	-28.96	11.95	-17.01
240	21.04	-8.05	12.99

4. A strangle is a combination of long position in a call and a put option with different strike prices but of same maturity on the same asset

Here , a strangle is created by buying the November 230 call and the November 210 put. at 4.6 and 6.05 respectively.

The maximum loss possible = sum of premiums = 4.6+6.05 = 10.65

The maximum loss will occur when neither of the options are exercised

Call option will not be exercised if St<230

Put option will not be exercised if St>210

Range of prices for maximum loss is 210< Stock price at maturity (St) < 230

Breakeven will occur when Stock price at maturity

= Put option strike - total premium or call option strike - total premium

= 210-10.65 or 230+10.65

= 199.35 or 240.65

So, breakeven will occur when the stock price at maturity is either 199.35 or 240.65

An investor would establish this position when the investor wants to take advantage of the volatility in the market. If the market is volatile and the stock price is either less than 199.35 or more than 240.65 , the investor makes a gain.