Question
In: Finance
You bought 1000 Google Shares for $400 each. You also sold call options on Google...
You bought 1000 Google Shares for $400 each. You also sold call options on Google with a strike of $435 for $20.
a) What is the maximum profit on your position?
b) What is the profit on your position when the stock hits $440?
c) Draw the profit/loss diagram for this position clearly marking the max loss and the maximum profit.
Solutions
Expert Solution
a) If the stock price goes up we will have a profit on Stock position, But after 435 we will have a negative payoff from selling a call option, therefore the benefit from stock will be set off by negative payoff from selling call option
Maximum profit = [(435 - Purchase Price of the Stock) + Option Premium collected on selling call option] x Number of Shares
Maximum profit = [35 + 20] x 1000 = 55000
b) Profit on Stock position = 440 - 400 = 40
Negative payoff from selling call = 435 - 440 = -5
Option premium collected on selling call = +20
Profit from the position = (40 - 5 + 20)x1000 = 55000
c)
| Stock | Stock | Call | Premium collected on call | Profit |
| 345 | -55000 | 0 | 20000 | -35000 |
| 350 | -50000 | 0 | 20000 | -30000 |
| 355 | -45000 | 0 | 20000 | -25000 |
| 360 | -40000 | 0 | 20000 | -20000 |
| 365 | -35000 | 0 | 20000 | -15000 |
| 370 | -30000 | 0 | 20000 | -10000 |
| 375 | -25000 | 0 | 20000 | -5000 |
| 380 | -20000 | 0 | 20000 | 0 |
| 385 | -15000 | 0 | 20000 | 5000 |
| 390 | -10000 | 0 | 20000 | 10000 |
| 395 | -5000 | 0 | 20000 | 15000 |
| 400 | 0 | 0 | 20000 | 20000 |
| 405 | 5000 | 0 | 20000 | 25000 |
| 410 | 10000 | 0 | 20000 | 30000 |
| 415 | 15000 | 0 | 20000 | 35000 |
| 420 | 20000 | 0 | 20000 | 40000 |
| 425 | 25000 | 0 | 20000 | 45000 |
| 430 | 30000 | 0 | 20000 | 50000 |
| 435 | 35000 | 0 | 20000 | 55000 |
| 440 | 40000 | -5000 | 20000 | 55000 |
| 445 | 45000 | -10000 | 20000 | 55000 |
| 450 | 50000 | -15000 | 20000 | 55000 |
| 455 | 55000 | -20000 | 20000 | 55000 |
| 460 | 60000 | -25000 | 20000 | 55000 |
Maximum loss will occur when the stock price is 0 which is calculated below
| Stock | Stock | Call | Premium collected on call | loss |
| 0 | -400000 | 0 | 20000 | -380000 |
jeff jeffy answered 1 year agoRelated Solutions
You bought 1000 Google Shares for $400 each. You also sold call options on Google...
You bought 1000 Google Shares for $400 each. You also sold call
options on Google with a strike of $435
for $20.
a) What is the
maximum profit on your position?
b) What is the profit
on your position when the stock hits $440?
c) Draw the
profit/loss diagram for this position clearly marking the max loss
and the maximum profit
You bought 100 Google Shares for $400 each. You also bought 1 put option on Google...
You bought 100 Google Shares for $400 each. You also bought 1
put option on Google with a strike of $395 for $20.
a) What is the
maximum loss on your position?
b) What is the profit
on your position when the stock hits $440?
c) Draw the profit/loss
diagram for this position clearly marking the maximum loss, and
breakeven
Assume you are holding 1000 shares of XYZ stocks. You are considering using call options to...
Assume you are
holding 1000 shares of XYZ stocks. You are considering using call
options to hedge downside risk. The stock is selling at $45 and the
following two call options are being considered for writing: an XYZ
July 40 (i.e., the strike price is $40, and it expires in July);
and an XYZ July 50. You are going to write 10 contracts, and each
contract contains 100 options.
Part I.
Your broker provided
you with the information about the...
3. (a) Define currency options contract. What are put and call options? (b) You bought a...
3. (a) Define currency options contract. What are put and call
options? (b) You bought a Dec. 20 call option on Australian dollar
with a strike price (K) of $0.7850/A$ in June 20 and paid a premium
of $0.02/A$. The current spot exchange (S) rate for A$ is
$0.7920/A$. (i) What are the intrinsic and the time values of this
option? (ii) (a)What is the profit/loss if the option is exercised
at expiration if the spot rate settles at $0.8000/A$?...
please fast A bank has just sold 500,000 call options on shares of a stock. The...
please fast
A bank has just sold 500,000 call options on shares of a stock.
The strike price is 40; the stock price is 40; the continuously
risk-free rate is 5%; the volatility is 30%; and the time to
maturity is 0.25. What position should the company take in the
stock for delta neutrality?
You own 400 shares of Shamrock Enterprises that you bought at $18 a share. The stock...
You own 400 shares of Shamrock Enterprises that you bought at
$18 a share. The stock is now selling for $32 a share. You put in a
stop loss order at $28. If the stock eventually declines in price
to $21 a share, what would be your rate of return with and without
the stop loss order? Round your answers to two decimal places.
Rate of return with the stop loss in percent
Rate of return without the stop loss...
You bought 500 shares of stock A at $600 on day 0 and you sold it...
You bought 500 shares of stock A at $600 on day 0 and you sold
it at $1000 on day 700. The daily discount rate is
0.0001%. How much profit did you make in terms of net present
value?
You bought 1000 shares of ABC stock on margin at the beginning of April 2012 at...
You bought 1000 shares of ABC stock on margin at the beginning
of April 2012 at $4.80 per share. You deposited a 50% margin which
was higher than the initial margin of 40%. The prime rate of
interest was 2.5% and your broker charged 125 basis points above
the prime rate on margin loan (assume simple interest rate). The
stock paid a cash dividend of $0.12 per share in February and
August of 2012. Your broker charged a flat fee...
John bought 1000 shares of TrippleChocolate in 2016 for $36.5 each. TrippleChocolate's share price was increasing...
John bought 1000 shares of TrippleChocolate in 2016 for $36.5
each. TrippleChocolate's share price was increasing 10% each year
since. In 2019 John sold the shares. If the capital gains tax rate
is 20%, dividends are taxed at 22%, and corporate tax rate is 21%,
how much cash can John pocket after the sale of shares (net of
taxes)?
You short sold 400 shares of a stock at $51 a share. The initial margin is...
You short sold 400 shares of a stock at $51 a share. The initial
margin is 50% and the maintenance margin is 25%. What is the amount
of your liability for this transaction as initially shown on your
account balance sheet? Select one:
a. $7,650
b. $5,100
c. $15,300
d. $10,200
e. $20,400
The answer is d or e? what does it mean initial transaction? The
first transaction that is shown on the Liability and Equity?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- 1. What is the historical role of investment bankers ? Has this role changed ? Why...
- How were the original Internet requirements met through its design? What are the two main requirements...
- discuss crowdfunding on platforms: What features of the services incorporate virality? What are some of the...
- A textbook of mass 2.08 kg rests on a frictionless, horizontal surface. A cord attached to...
- Describe a time when someone did not really listen to or understand a point you were...
- Enumerations Create an advanced enumeration to represent months (JANUARY – DECEMBER) called enuMonths Add internal properties...
- What is the minimum size of the automorphism group of a simple directed graph having more...
ADVERTISEMENT