Question

The current stock price of RWJ is $312.32. You have the following quotes on RWJ options:

Expiration	Exercise Price	Calls	Puts
Dec	305	27.40	8.25
Jan	310	18.43	14.15
Feb	315	19.55	20.00
May	320	25.55	30.40

a. Which of the options are in the money?
b. What is the exercise value of a February call option with a strike price of $315?
c. Suppose you buy 10 contracts of the February 315 call option. How much will you pay, ignoring

commissions
d. Suppose you buy 10 contracts of the February 315 call option. If RWJ stock is selling for $310 per

share on the expiration date, what is your profit or loss?
e. Suppose you buy 10 contracts of the February 315 call option. If RWJ stock is selling for $320 per

share on the expiration date, what is your profit of loss?
f. Suppose you buy 10 contracts of the May 320 put option. What is the maximum profit you could

achieve?

Answer 1

a]

A call option is in the money if the strike price of the option is below the current stock price.

A put option is in the money if the strike price of the option is above the current stock price.

The current stock price is $312.32

The 305 and 310 call options are in the money

The 315 and 320 put options are in the money

b]

Exercise value of a call option = Max[S-X, 0]

S = current stock price

X = strike price

Exercise value of 315 call option = Max[312.32 - 315, 0]

Exercise value of 315 call option = $0 (It is not profitable to exercise the 315 call option because the strike price is higher than the current stock price)

c]

Amount to pay to buy 10 February 315 call option contracts = 10 * premium per option contract

Amount to pay = 10 * $19.55

Amount to pay = $195.50

d]

If the stock is selling at $310 on expiration date, the options expire worthless because the exercise value of the options is zero (because the strike price is higher than the stock price at expiry)

Therefore, it is not profitable to exercise the options. Hence, the premium paid is the loss on the option contracts.

Loss = total premium paid = $195.50