Question

In: Finance

A short call option is sold for 1,460 dollars and covers 100 shares of Johnson Incorporated....

A short call option is sold for 1,460 dollars and covers 100 shares of Johnson Incorporated. If the Strike price of the option is 70, what is the break-even share price?

Solutions

Expert Solution

Call option is the option of upward movement of stock. It means if the stock price is high the difference of the stock price and exercised price will be the payoff. The person who buy the Call option (i.e. Long on call option) will get the money if the stock price increased and the person who has short the call option will have to pay.The benefit of short option is the amount of premium he received from shorting the call and his profit is also limited to the premium he collected.

In the given case,

We have short call option.

Which means we have received $1,460 as premium fro 100Shares.

Premium for 1 shares = $14.60 ($1460 / 100 )

Strike price for the Call option is $70, which means that if the price of stock increases from $70 we have to pay the difference of increased amount.

Break even share price will be = Strike price + Premium we received from short call option.

Break even share price will be = $70 + $14.60

Break even share price will be = $84.60.

Which means that if the stock price becomes $84.60 at the maturity of call we will pay the difference of strike price and current price which is $14.60 ($84.60 - $70 ) and that is the same amount which we have received, soo in that case we neither have any profit nor any loss.

Please hit the thumps up if you find it helpful and feel free to comment your query if any. Thank you

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

A fund manager has just sold a call option on 100 shares of a stock. The...
A fund manager has just sold a call option on 100 shares of a stock. The stock price is $87 and its volatility is 20% per annum. The strike price of the option is $89 and it matures in 6 months. The risk-free rate is 6% per annum (continuously compounded). a) What position should the fund manager take in the stock to achieve delta neutrality? b) Suppose after the fund manager sets up the delta neutral position, the stock price...
A trader has a call option contract to sell 100 shares of a stock for a...
A trader has a call option contract to sell 100 shares of a stock for a strike price of $50. What is the effect on the terms of the contract of the following events? (a) A $5 dividend being paid (b) A 5-for-4 stock split (c) A 10% stock dividend being paid.
A trader has a call option contract to sell 100 shares of a stock for a...
A trader has a call option contract to sell 100 shares of a stock for a strike price of $50. What is the effect on the terms of the contract of the following events? (a) A $5 dividend being paid (b) A 5-for-4 stock split (c) A 10% stock dividend being paid.
Selling Currency Call Options. Juan Bulsara sold a call option on Australian dollars (AUD) for USD.02...
Selling Currency Call Options. Juan Bulsara sold a call option on Australian dollars (AUD) for USD.02 per unit. The strike price was USD .86 (the exchange rate we use is AUDUSD), and the spot rate at the time the option was exercised was USD .82. Assume Mr. Bulsara did not obtain AUD until the option was exercised. Also, assume that there are 50,000 units in an AUD option. What was Mr. Bulsara’s net profit on the call option? (5 points)...
A bank has sold for $300,000 a European call option on 100,000 shares of a non-dividend...
A bank has sold for $300,000 a European call option on 100,000 shares of a non-dividend paying stockS0 = 49, K = 50, r = 5%, s = 20%, T = 20 weeks, m = 13%The Black-Scholes-Merton value of the option is $240,000 , how do you get to $240,000 ?
Peter has just sold a European call option on 10,000 shares of a stock. The exercise...
Peter has just sold a European call option on 10,000 shares of a stock. The exercise price is $50; the stock price is $50; the continuously compounded interest rate is 5% per annum; the volatility is 20% per annum; and the time to maturity is 3 months. (a) Use the Black-Scholes-Merton model to compute the price of the European call option. (b) Find the value of a European put option with the same exercise price and expiration as the call...
Peter has just sold a European call option on 10,000 shares of a stock. The exercise...
Peter has just sold a European call option on 10,000 shares of a stock. The exercise price is $50; the stock price is $50; the continuously compounded interest rate is 5% per annum; the volatility is 20% per annum; and the time to maturity is 3 months. (a) Use the Black-Scholes-Merton model to compute the price of the European call option. (b) Find the value of a European put option with the same exercise price and expiration as the call...
Peter has just sold a European call option on 10,000 shares of a stock. The exercise...
Peter has just sold a European call option on 10,000 shares of a stock. The exercise price is $50; the stock price is $50; the continuously compounded interest rate is 5% per annum; the volatility is 20% per annum; and the time to maturity is 3 months. (a) Use the Black-Scholes-Merton model to compute the price of the European call option. (b) Find the value of a European put option with the same exercise price and expiration as the call...
Suppose that a financial institution has sold for $300,000 a European call option on 100,000 shares...
Suppose that a financial institution has sold for $300,000 a European call option on 100,000 shares of a non-dividend stock. Assume that the stock price is $49, the strike price is $50, the risk-free interest rate is 5% per annum, the stock price volatility is 20% per annum, the time to maturity is 20 weeks (0.3826 years), and the expected return from the stock is 13% per annum. (b) (Strategy 1) The financial institution decides to do nothing but deposit...
Suppose the price of Apple’s common shares is $180/share. The call option contract (involves 100 shares)...
Suppose the price of Apple’s common shares is $180/share. The call option contract (involves 100 shares) on Apple, with a strike price of $195/share is $10/contract. With the $180 you have, you are looking at two choices: A: Buy one share of Apple’s common stock B: Buy 18 call option contracts (1) What are the rates of return on A and B if the share price has dropped to $170/share? (2) What are the rates of return on A and...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT