Question

Refer to the stock options on Apple in the Figure 2.10. Suppose you buy an October expiration call option with exercise price $105.

APPLE [Underlying Stock Price = $101.05]

Expiration Strike Call Put

September 95 6.20 0.21

October 95 6.35 0.33

September 100 2.20 1.18

October 100 2.62 1.55

September 105 0.36 4.35

October 105 0.66 4.75

a-1. If the stock price in October is $106, will you exercise your call?

	Yes
	No

a-2. What is the net profit/loss on your position? (Negative amount should be indicated by a minus sign.)

(Click to select)Net lossNet profit            $

a-3. What is the rate of return on your position? (Round your answer to 2 decimal places.)

Rate of return             %

b-1. Would you exercise the call if you had bought the October call with the exercise price $95?

	Yes
	No

b-2. What is the net profit/loss on your position? (Input the amount as a positive value.)

(Click to select)Net lossNet profit            $

b-3. What is the rate of return on your position? (Round your answer to 2 decimal places.)

Rate of return             %            

c-1. What if you had bought an October put with an exercise price of $105 instead? Would you exercise the put at a stock price of $105?

	Yes
	No

c-2. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Rate of return             %

Answer 1

Call option is excercised when Spot market price on the date of maturity is greater than the strike price. (S_T >K)

A put option is excercised when K>S_T

A1. October call strike price ,K =$105

Spot price, S_T =$106

Since St >K, hence call option will be excercised.

a1 Yes the call option will be excercised.

A. 2 Net profit / loss = S_T - K - Option Premium

= $106 -$105 -$0.66

= $0.34

A. 3. Rate of return = Net profit/ Option premium

=0.34/0.66 = 0.515

RoR = 51.5%

B1. If S_T =$106, K =$95, option premium =$6.35

Since S_T>K. Hence call option will be excercised.

B2. Net profit/loss = $106-$95-$6.35 = $4.65

B3. Rate of return = 4.65/6.35 = 0.7322

Rate of return = 73.22?

C1. October put option strike price $105

St = $105

Even if we will exercise the option we will not earn anything because S_T = K

Put option payoff = K - S_T = 105 - 105 = $ 0

Here we will lose all the amount that we had paid in the form of option premium.

Hence net profit or, loss = - $4.75

Rate of Return = -4.75/4.75 = -1

Rate of return = -100%.

Here our investment is equal to the option premium because this is the only that we pay to get the right of option.

For example., Option premium = $0.66/share

Exercise price = $105

S_T = $106

Contract size = 100 shares

Here option will be exercised at strike price of $105 .

Hence long position holder will pay = $105×100 = $10500

If he might have purchased from market he had paid =$106×100 =$10600

Profit = $10600 -10500 = $100

We paid $0.66 / share

Total payment = 0.66 ×100 = $66

Net profit =$100-66 =$34

Return from long call position = net profit/ option premium = 34/66 = 0.515

RoR =51.5%