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If you pay $4 for a call option on JPM stock with an at the money...

If you pay $4 for a call option on JPM stock with an at the money strike price of $100 and at the same time you write a call option with a strike price of $110 for which you receive $1; how much money do you make or lose on the transaction if the stock goes to either $120; $105; or $90?

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Expert Solution

A long call option will be exercised if the strike price < stock price.

A short call option will be exercised by the buyer if the strike price < stock price.

If the stock goes to $120

The $100 call option will be exercised by you.

Profit =  stock price - strike price - premium paid

Profit =  $120 - $100 - $4 = $16

The $110 call option will be exercised by the buyer.

Profit =  strike price - stock price + premium received

Profit =  $110 - $120 + $1 = -$9

Profit on transaction = $16 - $9 = $7

If the stock goes to $105

The $100 call option will be exercised by you.

Profit =  stock price - strike price - premium paid

Profit =  $105 - $100 - $4 = $1

The $110 call option will not be exercised by the buyer.

Profit = premium received

Profit = $1

Profit on transaction = $1 + $1 = $2

If the stock goes to $90

The $100 call option will not be exercised by you.

Profit =  zero - premium paid

Profit =  $0 - $4 = -$4

The $110 call option will not be exercised by the buyer.

Profit = premium received

Profit = $1

Profit on transaction = -$4 + $1 = -$3

jeff jeffy answered 8 hours ago
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