Question

Walmart Inc. (symbol: WMT) common stock currently trades at $106.76per share.

Jack is considering buying a calloption on WMT. He is given the following option, which will expire on 4/17/20.

[Table 5.1 Call price]

Strike	Call premium	ITM or OTM?
105	$9.90

Jill is considering buying a put option on WMT. She is given the following option, which will expire on 4/17/20.

[Table 5.2 Put price]

Strike	Put premium	ITM or OTM?
105	$8.00

A. (5 pts) Indicate if the 105-strike call option is in-the-money (ITM) or out-of-the-money (OTM)?

B. (5 pts) Indicate if the 105-strike put option is in-the-money (ITM) or out-of-the-money (OTM)?

C. (5 pts) If on April 17, 2020, WMT trades at $100, explain if Jack or Jill’s trade will be profitable.

D. The 105-strike call and 105-strike put were both sold at lower prices 5 days ago. Explain in one sentencewhy both call and put options have become more expensive.

Answer 1

As the stock price is higher than the strike price this call option is IN-THE MONEY.

Call options give the holder an option to buy a security at the strike price and when this is lower than the prevailing stock price then the call option is in the money.

This put option is out of the money. As the strike price us below the stock price of $106.76 , this put option is OUT-OF-MONEY.

None of them is profitable.

Jack has bought a call option, so Jack will not exercise his option and will lose the amount of premium paid which is $9.9.

Jill will also be not profitable as the net loss of Jill's position will be : ($105 - $100 - $8)

= - $3.

So, the net loss on Jill's position is $3.

Now, the stock price is $100. So, the strike price of both call and put is $105. This stock is volatile, hence the value of both the call and put option increases as the higher the volatility of the stock, the greater is the price of the option.