Question

Questions

The current price of Apple stock is $170 per share.

You observe the following option in the market today:

Call Option. July 2018 expiration, 180 strike price. Option Premium: $11.70

1. What is the minimum price Apple stock would have to be at option maturity in order for the holder of the option to make money?   

2. If the Apple share price is still $170 one day prior to the expiration of this option, what would you expect the value of the option to be?


3. If volatility suddenly decreases unexpectedly, what do you expect to happen to the value of the option?


4. Is this option in the money or out of the money?


5. What is the worst case loss for the seller of this option?


6. What is the worst case loss for the buyer of this option?


7. What is the best case gain for the seller of this option?


8. What is the best case gain for the buyer of this option?


You observe the following option in the market today:

Put Option. July 2018 expiration, 165 strike price. Option Premium: $11.90

1. What is the minimum price Apple stock would have to be at option maturity in order for the holder of the option to make money?   

2. If the Apple share price is still $170 one day prior to the expiration of this option, what would you expect the value of the option to be?


3. If volatility suddenly decreases unexpectedly, what do you expect to happen to the value of the option?


4. Is this option in the money or out of the money?


5. What is the worst case loss for the seller of this option?


6. What is the worst case loss for the buyer of this option?


7. What is the best case gain for the seller of this option?


8. What is the best case gain for the buyer of this option?

Answer 1

1. In a call option, the holder makes money when the price at maturity is more than the strike price

So, for the holder of option to make money , the minimum price of stock at option maturity is $180.

2. If the price is still $170, the option will become worthless and will have a value (1 day time value) of nearly 0 (just above 0)

3. If volatility decreases, the value of the option will also decrease .

4. The option is out of the money as no profit can be made from exercising the option immediately.

5. The worst case loss for the seller of option occurs when stock price rises and is limitless

Worst case loss = (stock price at maturity -180) -11.70 = Stock price at maturity - 191.70 .

As the stock price can potentially rise to any value, the worst case loss is also limitless, or infinite.

6. Worst case loss for the buyer is the premium i.e.$11.70

7. Best case gain for the seller is the premium =$11.70

8. Best case Gain for the buyer occurs when the stock price increases and is given by

(stock price at maturity -180) -11.70 = Stock price at maturity - 191.70 .

As the stock price can potentially rise to any value, the best case gain is also limitless, or infinite.