Question

You believe ABC stock will likely go up in the near term. The current stock price is $25. You decide to buy 10 ABC option contracts with $24 strike price that expires in 6 months. You are paying $2 per share call premium for the option. a) What’s the intrinsic value of this call option? b) What’s the breakeven stock price? c) Draw an option pay-off diagram of this long call position; d) If 6 months later, the stock price increases to $28, what’s the profit from the option? e) If the risk free rate is 3%, what’s the option put price?

Answer 1

The current stock price is $25

The strike price is $24

The current stock price > The strike price. The call option is in the money

a) The intrinsic value of in the money call option = The current stock price - The strike price

The intrinsic value of in the money call option = 25 - 24 = $1

b) The breakeven price of a call option = Strike price + call option premium

The breakeven price = 24 + 2 = $26

c) Payoff = max(St - X, 0)

Payoff = max(St - 24, 0)

Screenshot with formulas

d) St = $28

Profit = max(St - X, 0) - call option premium

Profit = max(28 - 24, 0) - 2

Profit = 4 - 2

Profit = $2 per share

Profit per contract = 2 * 100 = $200

Profit for 10 contracts = $200 * 10 = $2,000

e) P = X e^(-rt) + C - S

P = 24 * e^(-0.03 * 6/12) + 2 - 25

P = $0.6426865505