Question

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $28.

  

						Calls							Puts
				Strike
Option	Expiration			Price		Vol.			Last				Vol.			Last
Macrosoft		Feb		30			86			.33				41			1.33
		Mar		30			62			.57				23			1.74
		May		30			23			.85				12			2.16
		Aug		30			4			1.06				4			2.20

  

a.	Suppose you buy 11 contracts of the February 30 call option. How much will you pay, ignoring commissions?

    

Cost

$

  

Suppose you buy 11 contracts of the February 30 call option. Macrosoft stock is selling for $31 per share on the expiration date.

   

b-1	How much is your options investment worth?

  

Payoff

$

  

b-2	What if the terminal stock price is $30?

  

Payoff

$

   

Suppose you buy 11 contracts of the August 30 put option.

   

c-1	What is your maximum gain?

  

Maximum gain

$

   

c-2	On the expiration date, Macrosoft is selling for $24 per share. How much is your options investment worth?

  

Position value

$

  

c-3	On the expiration date, Macrosoft is selling for $24 per share. What is your net gain?

  

Net gain

$

   

Suppose you sell 11 of the August 30 put contracts.

  

d-1	What is your net gain or loss if Macrosoft is selling for $26 at expiration? (Enter your answer as a positive value.)

  

(Click to select)GainLoss

$

  

d-2	What is your net gain or loss if Macrosoft is selling For $32 at expiration? (Enter your answer as a positive value.)

  

(Click to select)LossGain

$

   

d-3	What is the break-even stock price? (Round your answer to 2 decimal places, (e.g., 32.16).)

  

Break-even

$

Answer 1

Solution:
a.	Cost         $   363
Working Notes:
First of all	Each of the option is of 100 shares
Under call option buy	We get right to get price difference of strike price and stock price above strike price.
Cost of buying 11 contracts of the February 30 call option = no. of contracts x (no. of shares in a option) x call price
	Cost of buying 11 contracts of the February 30 call option = 11 x 100 x .33
	Cost of buying 11 contracts of the February 30 call option = $363
b. 1.	Payoff          $1,100
Working Notes:
	Payoff = (Expiry price - strike price) x ( no. of contract ) x (no of shares in a contact)
	Payoff = ($31 - $30) x ( 11 ) x (100)
	Payoff = $1,100
b.2.	Payoff          $0
Working Notes:
	Payoff = (Terminal - strike price) x ( no. of contract ) x (no of shares in a contact)
	Payoff = ($30 - $30) x ( 11 ) x (100)
	Payoff = $0
C-1.	maximum gain    $   30,580
Working Notes:
First of all	Each of the option is of 100 shares
Under Put option buy	We get right to get price difference of strike price and stock price below strike price.
Maximum gain put option = (strike price - premium of Put of option ) x (no of contract ) x No of shares in a contract
	Maximum gain put option = (30 - 2.2 ) x (11 ) x 100
	Maximum gain put option = $30,580
Notes:	Gain under put option when price is lower than strike price of the put option.
	Down side of stock is it may be fall to zero
Maximum gain put option = (strike price - premium of Put of option ) x (no of contract ) x No of shares in a contract
C-2.	Position value    $6,600
Working Notes:
	Position value = (Strike price - selling price of stock) x No of contract x no of shares in a contract
	Position value = (30 - 24) x 11 x 100
	Position value = $6,600
C-3.	Net gain   $4,180
Working Notes:
Net Gain = (strike price -Selling price of the stock- premium of Put of option ) x (no of contract ) x No of shares in a contract
Net Gain = (30 -24- 2.20 ) x 11 x 100
Net Gain = $4,180
d-1.	Net loss    $1,980
Net Loss = (strike price -Selling price of the stock- premium of Put of option ) x (no of contract ) x No of shares in a contract
Net Loss = (30 -26- 2.20) x 11 x 100
Net Loss =$1,980
Notes:	As we sell put option we will be liable to pay difference between strike price and stock price below strike price, gain or loss is decided by deduction of net premium received
d-2.	Net gain   $ 2,420
Since stock price on expiry is above strike price of $32 , as we are seller of put option we will be not liable to pay any thing and our pure gain will be premium received.
	Net Gain = premium per share x no of contract x no of share per contract
	Net Gain = $2.20 x 11 x 100
	Net Gain = $2,420
d-3.	Break-even $27.80
Working Notes:
	As we are seller of put option , we received premium of $2.20 per share, & we will be required to pay under this contract only when stock price fall below strike price i.e. $30 .
	Break-even stock price is the price where premium received is set off against loss under the contract.
	Break-even stock price = Strike price - premium received per share
	Break-even stock price = $30-$2.20
	Break-even stock price = $27.80
Please feel free to ask if anything about above solution in comment section of the question.