Question

The market price of Fintech stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a 1-month call option contract with a strike price of $35 and an option price of $1.82. You also purchase a 1-month put option on the stock with a strike price of $35 and an option price of $.91. What will be your total profit or loss on all the transactions related to these option positions if the stock price is $38.68 on the day the options expire? $112 -$86.00 -$127.00 $95 $108

Answer 1

Give: 1 month call option contract with strike price of $35 and option price of $1.82

1 month put option contract with strike price of $35 and option price of $0.91

Stock price on day the option expires is $38.68

The feasible option position for above situation is a Straddle strategy.(long call and long put)

In a straddle strategy, we buy both put and a call for same stock with same expiration dates and strike prices. This strategy is good for stock which are volatile and non directional and the volatility will continue for sometime. We make profit either ways whether stock rises or falls. We will calculate the total profit/loss on all the transactions related to this position

Maximum profit = Unlimited

Initial cost of position = Adding the option prices of put and call = 1.82 + 0.91 = $2.73

Maximum loss can be as much you paid for the options since its a long call and long put there is no risk or negative cashflow., hence, Maximum loss = $2.73

Profit = Price of Underlying - Strike price of long call - Net premium paid or Strike price of long put - Price of Underlying - Net premium paid

(Assuming standard equity option contracts , which represent 100 shares) then initial cost is 2.73 per share and $273 per contract

=> 38.68 - 35 - 2.73 = $0.95 per share or $95 per contract

Answer = Profit = $95 per contract or $0.95 per share