Question

In: Finance

Suppose that a March call option on a stock with a strike price of $50 costs...

Suppose that a March call option on a stock with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the option be exercised? Under what circumstances will the holder of the option make a gain? Under what circumstances will the seller of the option make a gain? What is the maximal gain that the seller of the option can make? Under what circumstances will the seller of the option make the maximal gain?

Solutions

Expert Solution

Since it is a call option, it will be exercised when the price will be greater than $50.

Seller will gain when the spot price will be greater than premium + strike price.

max gain of seller will be $2.50

Seller will make max gain when option is not exercised and he gets max premium.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

A call option with a strike price of $50 costs $2. A put option with a...
A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. Construct a table that shows the payoff and profits of the strangle.
(Delta-Hedge / No Rebalancing) Suppose a stock price is $50, a call option has a strike...
(Delta-Hedge / No Rebalancing) Suppose a stock price is $50, a call option has a strike price of $50 and the call’s market price is $4. A dealer sells 10 call option contracts (for 1000 option-shares).   The original Delta is .55 (a) What does our basic hedging logic say is the Dealers’ real risk and what should be generally done. (b) To start a Delta Hedge, what should the dealer do NOW, and what should it cost ? (Hint-550 shares)....
Suppose we have a call option on a stock with the following details: strike price $50,...
Suppose we have a call option on a stock with the following details: strike price $50, current stock price $50, call option premium $5. If we buy the call option, calculate the resulting holding period return for the following future stock prices on the expiry date of the option: Future stock price at option expiry                                          Return on call option $45 $50 $55 $60 $70 $80
Suppose a call option with a strike price of $43 costs $5. Suppose a put option...
Suppose a call option with a strike price of $43 costs $5. Suppose a put option with a strike price of $43 also costs $5. You decide to enter a strip (\/), which has a slope of negative 2 prior to the kink point and positive 1 after the kink point. What is the profit of the strategy if the stock price is 37 at expiration? (required precision: 0.01 +/- 0.01)
A call option on a stock with a strike price of $60 costs $8. A put...
A call option on a stock with a strike price of $60 costs $8. A put option on the same stock with the same strike price costs $6. They both expire in 1 year. (a) How can these two options be used to create a straddle? (b) What is the initial investment? (c) Construct a table that shows the payoffs and profits for the straddle when the stock price in 3 months is $50, and $72, respectively. The table should...
Suppose that a 6-month European call A option on a stock with a strike price of...
Suppose that a 6-month European call A option on a stock with a strike price of $75 costs $5 and is held until maturity, and 6-month European call B option on a stock with a strike price of $80 costs $3 and is held until maturity. The underlying stock price is $73 with a volatility of 15%. Risk-free interest rates (all maturities) are 10% per annum with continuous compounding. (a) Construct a butterfly spread with the two kinds of options....
Suppose that a 6-month European call A option on a stock with a strike price of...
Suppose that a 6-month European call A option on a stock with a strike price of $75 costs $5 and is held until maturity, and 6-month European call B option on a stock with a strike price of $80 costs $3 and is held until maturity. The underlying stock price is $73 with a volatility of 15%. Risk-free interest rates (all maturities) are 10% per annum with continuous compounding. (a) Construct a butterfly spread with the two kinds of options....
Consider a call option on a stock, the stock price is $23, the strike price is...
Consider a call option on a stock, the stock price is $23, the strike price is $20, the continuously risk-free interest rate is 9% per annum, the volatility is 39% per annum and the time to maturity is 0.5. (i) What is the price of the option? (6 points). (ii) What is the price of the option if it is a put? (6 points) (iii) What is the price of the call option if a dividend of $2 is expected...
Suppose you have a call option on a stock with a strike price of $2 2....
Suppose you have a call option on a stock with a strike price of $2 2. A) Fill in the stock price and strike price in the table and calculate the exercise value ( B) Plot the Stock price on the x-axis and the Exercise value on the y-axis. Be sure to label both axes with titles and include a chart title. Now assume you have the following data for a call option: Current stock price Strike price Time to...
Option Strike Price $ Call Option Price $ Put Option Price $ 45 10.00 1.00 50...
Option Strike Price $ Call Option Price $ Put Option Price $ 45 10.00 1.00 50 5.00 2.00 55 1.50 3.00 60 1.00 7.50 Using the quotes from the table above, an investor makes the following transactions: (1) buys the stock at $55, and (2) writes the December Call with a strike price of $55. If the stock is selling for $62 per share, when the options expire, the profit from the trades is closest to a: . Multiple Choice...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT