Question

Options trade on the common stock of Taz, Inc. that have a strike price of $50.75 and a premium of $1.50. In each of the next four parts, calculate the net profit (or loss) on the option position, where net profit includes the premium in the calculation.

Note: Negative responses should be placed with a preceding negative sign (e.g. -4.50) and not with parentheses (e.g. (4.50)).

Part 1: Calculate the net profit or loss from BUYING a CALL option on Taz if at the time of expiration the price per share of Taz is $51.00. $

Part 2: Calculate the net profit or loss from WRITING a CALL option on Taz if at the time of expiration the price per share of Taz is $51.00. $

Part 3: Calcuate the net profit or loss from BUYING a PUT option on Taz if at the time of expiration the price per share of Taz is $51.00. $

Part 4: Calcuate the net profit or loss from WRITING a PUT option on Taz if at the time of expiration the price per share of Taz is $51.00. $

Answer 1

Solution:

Strike price: $50.75, premium: $1.50.

Part 1: Net profit or loss from BUYING a CALL, when price per share is $51.00 on expiry day

Net Profit or Loss : (Price on Expiry - Strike Price) - Premium paid for call

Net Profit or Loss : ($ 51.00 - $ 50.75) - $1.50

Net Profit or Loss : - 1.25

Part 2: Net profit or loss from WRITING a CALL, when price per share is $51.00 on expiry

Net Profit or Loss: Premium received on call - (Price on Expiry - Strike Price)

Net Profit or Loss : $ 1.50 - ($ 51.00 - $ 50.75)

Net Profit or Loss : 1.25

Part 3: Net profit or loss from BUYING a PUT, when price per share is $51.00 on expiry

Net Profit or Loss: - Premium paid on PUT  

Net Profit or Loss: - $ 1.50

Part 4: Net profit or loss from WRITING a PUT when price per share is $51.00 on expiry

Net Profit or Loss: Premium received on PUT  

Net Profit or Loss: $ 1.50

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