Question

You decide to place 10 put options, each of which has one COMPNY X share as the underlying asset. The exercise price of these options is EUR 31, and their premium, ie the market price, is today EUR 3 per option. The exercise date of the options is after six months.

At the same time, you buy 15 call options, the underlying asset of which is also one COMPANY X share. The exercise price of the call options is EUR 18 and the premium is EUR 1 per option. The exercise date of the call options is also after six months.

What is the profit or loss of your stock options in euros if the market price of a COMPANY X share on the exercise date after six months is EUR 25? Be sure to consider the premium you received / paid for the options.

Select one:

a. -30 euros.

b. -60 euros.

c. 60 euros.

d. 30 euros.

Answer 1

C) 60 euros

Explanation:

calculation

He sells put option. In this case we receive premium and the option is exercised by option buyer when exercise price is more than current stock price.

As the condition is satisfied, the option buyer exercises the put option and we only receive premium.

Calculation

Profit /loss for option writer = - Max(Strike price - stock price , 0 ) + premium received

= - Max(31 - 25 , 0) + 3

= - (6,0) + 3

= -6 + 3

= -3

So, the option writer loses Euro 3 on 1 put option . As he sells 10 put options , so he loses total of 3 × 10 i.e. Euro 30

Loss from put option = Euro 30

Secondly, he buys call option, which is exercised when stock price is more than strike price. In this case option is exercised and total profit which he earns is as follows:-

Profit= number of option [Max(0, stock price - strike price) - premium paid]

= 15 [Max(0, 25 -18) - 1]

= 15 [Max (0,7) - 1]

= 15 [ 7 - 1]

= 15 (6)

= Euro 90

Total profit or loss

= profit/loss on put + profit /loss on call

= -30 + 90

= Euro 60