Question

1. On October 6, 2019, Miss Mimie bought 10 put option contracts for FFM Incorporation, with strike price of $30, expiring in January 2020, at $2.20 per share, paying a typical commission of $9.95 per trade plus $0.75 per contract. FFM Incorporation price drops to $25 per share by expiration day in January 2020. Miss Mimie must exercise her put option, allowing her to buy 1,000 shares of FFM Incorporation in the open market for $25 per share, and selling it for $30 per share to a put buyer.

You are required to compute.

1. Total buying cost for the 10 calls contracts.       

2. Total selling cost for the 10 calls contracts.       

3. Net profit of the contracts.       

4. Rate of return for 2 months.       

Answer 1

Solution :

(a) Total Buying cost for 10 calls contracts = $9.95 + 10 x 0.75$ = 17.45 $

Premium on purchase of options = 1000Shares x 2.2$ = 2200$

Total buying cost = 2217.45$ (17.5$ + 2200$)

(b) Total Selling cost for 10 calls contracts is as shares are sold in one trade which would incur Commission of 9.95$ and 0.75$ per each Call contract which total    amounts to 17.45$

(c) Net profit of the contracts

(1) Sales Price of each share = 30$ x 1000 = 30000$

( 2) Selling cost of Shares = 17.45 $ (from b)

   (3) Net Sale Value of Shares = 29982.55 $ (1 - 2)

(4) Total Purchase price of Share = 25000$ (1000share x 25$ per share )

    (5) Total Buying Cost = 2217.45$(from a)

(6) Total Cost = 27217.45$ ( 4+5)

(7) Net Profit = 2765.1$ (3 - 8 )

(d) Calculation of return for 2m  

  Total intial investmnt incurred = Buying cost

    = 2234.9$ (A)

Total Profit = 2765.1$ ( from c ) (B)

Generally opions expires on third friday of the month i.e nearly 18th of jan the return is

From Oct 6 - jan 18 = 3 and half months

Return for 3 and half months = (B)/ (A) =2765.1$/2234.9$ x100 = 123.72%

   Return for 2months = 123.72% x 2/3.5 = 70.69 %