Question

The spot offer price of Google stock is $1,044.15 and the offer price of a call option with a strike price of $1,100 and a maturity date of September is $50.60. A trader is considering two alternatives: buy 100 shares of the stock and buy 100 September call options. For each alternative, what is (a) the upfront cost, (b) the total gain if the stock price in September is $1,250, and (c) the total loss if the stock price in September is $950. Assume that the option is not exercised before September and if stock is purchased it is sold in September.The spot offer price of Google stock is $1,044.15 and the offer price of a call option with a strike price of $1,100 and a maturity date of September is $50.60. A trader is considering two alternatives: buy 100 shares of the stock and buy 100 September call options. For each alternative, what is (a) the upfront cost, (b) the total gain if the stock price in September is $1,250, and (c) the total loss if the stock price in September is $950. Assume that the option is not exercised before September and if stock is purchased it is sold in September.

Answer 1

Answer to Question :

An option is a contract that gives its owner the right (but not the obligation) to buy or sell an underlying asset(for example share of a company . foreign currency etc) on or before a given date at a fixed price ( This fixed price is called as Exercise price or Strike Price)

A Call Option gives the buyer of the option the right but not obligation to buy a currency or share. A call option is exercised when the spot price is more than strike price.

Given,

Alternative I:

Stock:

(Assume Stock is sold in September)

Spot offer Price of Google Stock(Purchase Price) = $1044.15

No. of Google Stock purchased = 100

a) Upfront Cost of Stock = Purchase price of 100 Google Stocks = $1044.15*100

= $1,04,415

b) The total gain if the stock price in September is $1,250= (Sale Price - Purchase Price)* No of Stocks

= ( $1,250- $1044.15 )*100

= $20,585

c) The total loss if the stock price in September is $950 = (Sale Price - Purchase Price)* No of Stocks

= ( $950- $1044.15 )*100

= $9,415

Alternative I:

Option:

Offer price of a call option = $50.60

Strike Price = $1100

No. of Option purchased = 100

a) Upfront Cost of Option = Offer price of a call option* No. of Option purchased

= $50.60 * 100

= $5,060

b) The total gain if the stock price in September is $1,250= (Spot Price - Strike Price )* No of Options

=($1250- $1100)* 100

= $15,000

c) The total loss if the Spot price in September is $950 = (Spot Price - Strike Price )* No of Options

= ($950- $1100)* 100

= $15,000

(Assuming Option is not erercised before September)