Question

You buy a call with a strike price of $100 on stock that you have shorted at $100 (this is a “protective call”). What are the expiration date profits to this position for stock prices of $90, $95, $100, $105, and $110 if the call premium is $6.50? (A negative value should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your call profit and net profit answers to 2 decimal places and round your other answers to the nearest whole number.)

Stock Price Short Profit   Call Payoff Call Profit Net Profit

$90 _________ _________ ________ ________

$95 _________ _________ ________ ________

$100 _________ _________ ________ ________

$105 _________ ________ ________ ________

$110 ________ ________ ________ ________

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Suppose you write 36 call option contracts with a $80 strike. The premium is $4.33. Evaluate your potential gains and losses at option expiration for stock prices of $70, $80, and $90. (Input all amounts as positive values. Do not round intermediate calculations.)

At stock price of $70, the _______ is _______

At stock price of $80, the _______ is _______

At stock price of $90, the _______ is _______

Answer 1

Below is the completed table of the long call and short stock profit:

	Short Stock Price	Strike price	Premium
	100	100	6.5
Spot price	Short Profit	Call payoff	Call Profit	Net Profit
90	10	0	-6.5	3.5
95	5	0	-6.5	-1.5
100	0	0	-6.5	-6.5
105	-5	5	-1.5	-6.5
110	-10	10	3.5	-6.5

• As we have short the stock, when the price goes down, we can buy low and fulfill the contract at 100 so the profit = 100 - spot
• Call option expires out of the money when the spot is lower than strike, payoff = 0 and loss = premium paid
• Call option expires in the money when the spot is greater than strike, payoff = spot - strike and profit = payoff - premium
• Net profit = profit from stock +profit from call

• At stock price of $70, the option is out of the money so is not exercised by the long party, therefore the premium received is all profit, which is 36 x 4.33 = 155.88
• At stock price of $80, the option is at the money so it is exercised by the long party, however payoff is 0 therefore the premium received is all profit, which is 36 x 4.33 = 155.88
• At stock price of $90, the option is in the money so it is exercised by the long party, the payoff is 90-80 per call = 10 for the long so -10 for the short and therefore the profit = payoff + premium, which is 36 (-10+4.33) = -204.12