Question

ST:  Market price	Will put	Dollar
of IBM	buyer exercise	profit/loss
19 July 2013	the put?(yes or no)	to put writer
0
80
90
100
110
120
130
140
150
160
170
180
190

(a) Will call buyer exercise the call when market price on July 19 is $90?Please answer yes or no. Suppose you write a IBM call which was sold for $7.00 on Apr 9 2013 with exercise price X=$110, on Expiration date July 19,2013, given different possibilities of market prices, please answer. Hint: Profit/ loss is not payoff.Each put is 100 shares. how much is total profit/loss for put writer( who writes a call) if the market price on July 19 is $100? each option contract is 100 shares How much is the total profit/loss for a put writer when market price on July 19is $140? each option contract is 100 shares

Answer 1

Profit / loss to call writer on expiration (July 19, 2013) for a call option with Strike price of $110 and call premium of $7:

ST: Market price	Will call	Dollar
of IBM	buyer exercise	profit/loss
19-Jul-13	the call?(yes or no)	to call writer
0	No	$7
80	No	$7
90	No	$7
100	No	$7
110	No	$7
120	Yes	-$3
130	Yes	-$13
140	Yes	-$23
150	Yes	-$33
160	Yes	-$43
170	Yes	-$53
180	Yes	-$63
190	Yes	-$73

It is evident from the above table that the option buyer will exercise call option only when the spot price is greater than the strike price of $110.

If the call option is not exercised, the profit to call writer will be price of call option $7

If the call option is exercised, the loss to call writer will be equal to

Loss = exercise price ($110) - market price of IBM stock + price of call option ($7) (negative sign is for loss)