Question

1. Suppose a novice investor buys a call option on 45,000 barrels of oil with an exercise price of $45 per barrel and simultaneously buys a put option on 45,000 barrels of oil with the same exercise price of $45 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $43 and ________ if the price per barrel is $47.

A) −$2; $2

B) −$2; $0

C) $0; $2

D) $2; −$2

E) $2; $2

Answer 1

In case of buy of Call option, buyer gets right to buy.
In case of buy of Put option, buyer gets right to Sell.
Investor buys a call option on 45000 barells of oil with exercise price of $ 45 per barrel.
Also, Investor buys a Put option on 45000 barells of oil with exercise price of $ 45 per barrel
1. If market price per barrel is $ 43,
In the case of call option investor would not exercise call option due to higher exercise price in comparison to market price.
Thus no profit no loss on exercise.
In the case of Put option investor would exercise Put option due to higher exercise price in comparison to market price.
thus profit of $ 2 ( $ 45-$ 43) would arise
2. If market price per barrel is $ 47,
In the case of call option investor would exercise call option due to lower exercise price in comparison to market price.
thus profit of $ 2 ( $ 47-$ 45) would arise
In the case of Put option investor would not exercise Put option due to lower exercise price in comparison to market price.
Thus no profit no loss on exercise.
Therefor answer would be E. i.e. $ 2; $ 2