You are long two option contracts: one Chicago Board Options Exchange call contract on a stock...

You are long two option contracts: one Chicago Board Options Exchange call contract on a stock with a strike price of $25 and one put contract with a strike price of $20. You paid a premium for the call options of $3.00 per option share and paid a premium for the put option of $2.00 per option share. Your total profit (loss) if the stock price at expiration were $15.00 would be _$____________

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Expert Solution

Call Option:

Holder of call option will have right to buy underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of call option.
Holder of calloption will exercise the right, when expected future spot price > Strike Price. Then writer of option has obligation to sell at the strike Price.
Holder will go for call option if he is bullish.

If the Future SPot Price > Strike Price - In the Money
If the Future SPot Price = Strike Price - At the Money
If the Future SPot Price < Strike Price - Out of the Money

Put Option:

Holder of Put option will have right to sell underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of Put option.
Holder of put option will exercise the right, when expected future spot price < Strike Price. Then writer of option has obligation to buy at the strike Price.
Holder will go for put option, if he is bearish.

If the Future SPot Price < Strike Price - In the Money
If the Future SPot Price = Strike Price - At the Money
If the Future SPot Price > Strike Price - Out of the Money

As future Stock Price ( 15)< Strike Price ( $ 25 ), Call option is lapsed.

As future Stock Price ( 15 ) < Strike Price ( $ 20 ), Put option is exercised.

Value of Put = Strike Price - Future Spot price

= $ 20 - $ 15

= $ 5

Value of call = $ 0 as it is lapsed

Total Profit = Value of call + Value of Put - Premium paid on Call - Premium paid on Put

= $ 0 + $ 5 - $ 3 - $ 2

= $ 0

Proit earned is $ 0

jeff jeffy answered 1 year ago

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