Question

Ralph thinks that future economic conditions will cause Intel (INTC) stock to fluctuate wildly. Ralph wants to make money on this, so he buys both a call option and a put option on INTC with a strike price of $33.00. INTC is currently trading at $33.00. The premium on the put option is $1.00 and the premium on the call option is $0.75. Which of the following actions by INTC stock will result in the largest net gain on this transaction for Ralph?

Group of answer choices

INTC rises to $34.00

INTC rises to $34.75

INTC rises to $36.00

INTC drops to $28.00

Answer 1

Solution :-

Exercise Price = $33.00

Put Option Premium = $1.00

Call Option Premium = $0.75

Total Premium = $1.00 + $0.75 = $1.75

Note :- If Price is Greater than Strike price then Exercise Call Option

And If Price is Lower than Strike Price then Exercise Put Option

(i) If Stock Rises to $34.00

then we need to exercise Call Option and leave Put Option

Therefore Net Gain = ( $34 - $33 ) - $1.75 = - $0.75

Net Loss of $0.75

(ii) If Stock Rises to $34.75

then we need to exercise Call Option and leave Put Option

Therefore Net Gain = ( $34.75 - $33 ) - $1.75 = $0.00

No Gain No Loss

(iii) If Stock Rises to $36.00

then we need to exercise Call Option and leave Put Option

Therefore Net Gain = ( $36.00 - $33 ) - $1.75 = $1.25

Net Gain of $1.25

(iv) If Stock Price Drops to $28.00

then we exercise Put Option and leave Call Option

Therefore Net Gain = ( $33.00 - $28 ) - $1.75 = $3.25

Net Gain of $3.25

Therefore the Correct Answer is (D)

INTC drops to $28.00 will result in the largest net gain on this transaction for Ralph

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