Question

Consider the Options on the Health Care Sector Index that are traded on the CBOE. Assume the current index value is 854.87.

Consider the September call option with a strike price of $850 which has an option premium of $81. Calculate the following:

1. Intrinsic value
2. Time value
3. Maximum gain if you are long the option
4. Maximum loss if you are long the option
5. At what index value would you earn zero profit if you exercise the option

Consider the September put option with a strike price of $850 which has an option premium of $72.50. Calculate the following:

1. Intrinsic value
2. Time value
3. Maximum gain if you are short the option
4. Maximum loss if you are short the option
5. At what index value would you earn zero profit if the option is exercised against you

Answer 1

1)
a) Intrisic value of call option= Current index value - Strike price of option
=854.87-850
=4.87$
b) Time value = Option price - Intrinsic value
=81-4.87
=76.13$
c) Maximum gain if you are long the option is unlimited
d) Maximum Loss if if you are long the option is limited to premium paid i.e 81$
e) When Index level is equal to Strike price + Premium paid (i.e 850+81 = 931$) The there will be zero profit if you exercise the option, thus answer 931$

2)
a) Intrisic value of put option= Strike price of option - Current index value
=850-854.87
=0$ (Since intrinsic value can't be negative)
b) Time value = Option price - Intrinsic value
=72.5-0
=72.5$
c) Maximum gain if you short the option is Premium paid
=72.5$
d) Maximum Loss if if you short the option is Stike price - premium received

=850-72.5 = 777.5$

e) When Index level is equal to Strike price - Premium received (i.e 850-72.5 = 777.5$) The there will be zero profit if option is exercised against you thus ans 777.5$