Question

Answer the following questions:

1. You purchased six ABC $70 Dec 2020 put option contracts at a quoted price of $2.50. What is your net gain or loss on this investment if the price of ABC is $68 on the option expiration date?

2. Suppose that several rumors concerning ABC have circulated on the internet. These rumors have led to an increase in volatility in the stock. To take advantage of this situation, you decide to buy both a December put and a call option on ABC. The put has an exercise price of $68 and the call has an exercise price of $72. You purchased the call at a price of $2.00 and the put at a price of $1.20. What will be your total profit or loss on these option positions if the stock price is $75 on the day the options expire?

3. Suppose that you sold four Feb 2021 put contracts on ABC stock at an option price of $0.75. The options have an exercise price of $60. At expiry assume that ABC stock is selling for $63 a share. What is your total profit or loss on this trade? Ignore transaction costs and taxes.

Answer 1

We purchase six put option contract at 70$ on ABC for December 2020 at 2.5$ per contract

Cost for put option = 2.5*6

                           =    15 $

On excercise date ABC Is traded at 68 so we will excercise put option

Profit due to put option = 6*(70-68)

      Profit                     6*2=12$

Net profit = 12-15

Net profit = -3 $

So there is net loss of $3

Several romour on internet lead to increase in volitality so to take advantage we purchase both call and pur option for December

We have purchased call option at excercise price of 72$ for 2$ and

Put option at excercise price of 68 for 1.2$

Total cost for call & put options =3.2$
(2+1.2)

On excercise day spot rate is $ 75

So we will not excercise put option

But we will excercise call option at $72

So gain due to call option =75-72 = 3$

Net profit = 3$-3.2$

=-0.2 per call & put option

So there is net loss of 0.2 $ on one option

I sold four February 2021 put option on ABC at exercise price of 60 at price of 0.75 $ per put option.

So I get 0.75 $ *4 = 3 $ for selling put option

On excercise date stock is trading at 63$ so purchaser will not excercise put option

Net gain form this transection = 3$