Question

In: Finance

1. Bluefish has a put option that trades with a strike price of $74. The put...

1. Bluefish has a put option that trades with a strike price of $74. The put option premium is $12. Determine the profit/loss on WRITING one Bluefish put option if at the option's expiration the stock price is $50.

2. Kingfish has call options trading with a strike price of $77 and a premium of $10. Determine the profit/loss to the buyer of the call option if at the time of expiration the stock price is $63.

Solutions

Expert Solution

> Formula

Profit/Loss Calculation

  • Writer of put option
    • Put Option = [ ( Market Price - Strike price ) + Option Premium ], if strike price > MarkePrice
    • Put Option = [ 0 + Option Premium ], if strike price < Market Price | Option lapse
  • Buyer of call option
    • Call option = [ ( Market Price - Strike price ) - Option Premium ], if strike price < Market Price
    • Put Option = [ 0 - Option Premium ], if strike price > Market Price because option lapse

> Calculation

1) Put Option seller

Since, strike price > MarkePrice

Profit/loss = [ ( Market Price - Strike price ) + Option Premium ]

                = [ (50-74) + 12 ]

                = -12

The loss of $ 12.

2) Call Option Buyer

Since, strike price > Market Price, thus option lapse

Profit/loss = [ 0 - Option Premium ]

                = [ 0 - 10 ]

                = -10

The loss of $ 10.

Hope you understand the solution.

           

jeff jeffy answered 1 year ago
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