Question

Assume the current market prices for UUU, WWW, XXX, YYY, and ZZZ are

$23.62, $7.85, $29.62, $29.18, and $78.08 respectively. Determine whether

the following options are in, at, or out of the money. Let 1 be "in",

0 be "at", and -1 be "out".

1. A put option you are holding on UUU stock has a strike price of $24.00.

The put premium on the option was $0.14 per share when you bought it.

2. A call option you are holding on WWW stock has a strike price of $7.50.

The call premium on the option was $0.20 per share when you bought it.

3. A call option you wrote on XXX stock has a strike price of $32.00.

The call premium on the option was $0.21 when you wrote the option.

4. A put option you wrote on YYY stock has a strike price of $28.00.

The put premium on the option was $0.17 when you wrote the option.

5. A put option you are holding on ZZZ stock has a strike price of $78.00.

The put premium on the option was $0.14 when you bought the option.

George bought a European put option contract in UWY stock from Julie with a

striking price of $41.59 per share. He paid $1.32 per share for

this option contract. The size of the contract was 100 shares.

6. Suppose the market price of UWY stock was $41.52 per share at

expiration. If the option was exercised at expiration, Julie would

A. buy the put option at $41.59 per share.

B. sell the put option at $41.52 per share.

C. buy a call option at $41.52 per share.

D. buy UWY stock at $41.59 per share.

E. buy UWY stock at $41.52 per share.

F. sell UWY stock at $41.59 per share.

G. sell UWY stock at $41.52 per share .

7. Suppose the market price of UWY stock at expiration is $41.52. Assume

that both George and Julie are rational in the sense that if they could

choose to exercise the option, then they would do so rationally. Assume

that neither George nor Julie have any UWY stock at expiration, nor do

they want to hold any UWY stock so that they will buy or sell stock

before or after any trading by the option to return to their zero

holding of stock UWY. State the net profit per share that Julie would

make on this option (If Julie loses money, show it as a negative

number). The "net" means taking into account the premium on the option.

8. Suppose that instead of $41.52, the market price of UWY stock at

expiration is $41.48. Assume again the George and Julie are both

rational and neither hold nor want to hold any UWY stock. State the net

profit per share that Julie would make on this option.

Suppose Gail buys a futures contract in oats from Sam at a price of

$1.95 a bushel. An oats futures is for 5000 bushels.  

9. If the price of oats at expiration is $1.83 per bushel, what is Gail's

total profit on her futures contract? (Total profit is NOT profit per

bushel.) (Also, assume there is no marking to market, even though in

reality all futures contracts are marked to market.)

10. Instead of the price of oats at expiration being $1.83 per bushel,

assume it is $2.12 per bushel. Now what is Gail's total profit

on her futures contract?

Answer 1

Ans No 1 – As the underlying current market price of stock is below the strike price, therefore put option is in the money

Ans No 2 – As the underlying current market price of stock is above the strike price; therefore call option is in the money

Ans No 3 – As the underlying current market price of stock is below the strike price at which call option was written; therefore call option is in the money.

Ans No 4 – As the underlying current market price of stock is above the strike price at which put option was written; therefore put option is in the money.

Ans No 5 – As the underlying current market price of stock is above the strike price at which put option was bought; therefore put option is out of the money.

Ans No

6 (A) – No, Julie would not buy the put option as contract has expired.

6 (B)- No, Julie would not Sell the put option as contract has expired.

6 (C)- No, Julie would not be able to buy the call option as contract has expired.

6 (D)- Yes, Julie will have to buy the stock at $41.59

6 (E)- No, Julie would not be able to buy the stock at $41.52

6 (F)- No, Julie would not be able to sell stock at $41.59 as she has already sold her share. (Assumed no stock lying in her portfolio)

6 (G)- No, Julie would not be able to sell stock at $41.52 as she has already sold her share. (Assumed no stock lying in her portfolio).

7. Julie has written the put option and got premium of $ 1.32. Since Option is at the money and George does not want to exercise the option, Julie made profit of $ 1.32.

8. There would be not be any change of answer as compared to 7 (above), as George does not want to exercise option, Julie would make a profit of $ 1.32.

9. Since Future was bought at $ 1.95 per bushel and price at expiration is $1.83, contract is in loss. 5000*(1.83-1.95)= Loss of $6

10. Profit in sales of Bushel future = 5000*(2.12-1.95)= $8.5