AMZN closed at $1,162.35 on 2017.12.01. A 2018.03.16 call option with a strike price of $1,000...

AMZN closed at $1,162.35 on 2017.12.01. A 2018.03.16 call option with a strike price of $1,000 sells for $182.30.

a) What is the intrinsic value of this option?

b) What is the time value of this option?

c) Your fancy computer estimates the volatility of AMZN as σ = 20.00 % and the risk free rate is r = 3.00 %. Given this information, what is the Black-Scholes value of this option?

d) Given the Black-Scholes value obtained in the previous problem, would you enter a long (buy) or short (sell/write) position in this option?

Solutions

Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

. a. The intrinsic value of an option:
The extent to which option is in the money (i.e the difference between stock price and strike price).

Intrinsic value= (stock price- strike price).

=1162.35-1000
= $162.35

b. Value of option = intrinsic value + time value

182.30 = 162.35+ Time value.
Time value = $19.95

c. In the Image.

d. Actual Trading price = 182.30
Should be the trading price (as per black Scholes model) = 174.45

Since Actual is Costly. TAP THE SELL BUTTON. Sell/Write the Option.

jeff jeffy answered 1 year ago

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