Question

In: Finance

today’s share price of Apple is $270. You think Apple’s stock will rise over the next...

today’s share price of Apple is $270. You think Apple’s stock will rise over the next 3 months. Today you observe the following option prices (all expiring in 3 months): Option 1: Call Option Premium = $9; with a Strike Price = $275 Option 2: Call Option Premium = $7; with a Strike Price = $280

1. Which of these options is in-the-money today?

A) Both B) Neither C) Only Option 1 D) Only Option 2 4

2. Today you buy Option 1 and sell Option 2; (i.e. bull call spread). At expiration the stock price equals $279. What is your profit or loss (on a per share basis)?

A) A loss of $5 B) A loss of $3 C) A profit of $2 D) A profit of $3 E) A profit of $5

3. Suppose you purchase Option 1 and also purchase Option 2. What is your breakeven stock price (on a per share basis) at expiration?

A) $284 B) $285.50 C) $287.50 D) $291 E) $296

Expert Solution

today’s share price of Apple is $270. You think Apple’s stock will rise over the next 3 months. Today you observe the following option prices (all expiring in 3 months): Option 1: Call Option Premium = $9; with a Strike Price = $275 Option 2: Call Option Premium = $7; with a Strike Price = $280

1. Which of these options is in-the-money today?

B) Neither

For call option in the money happens when the strike price is less than spot price and neither of the strike prices are lower than spot price.

2. Today you buy Option 1 and sell Option 2; (i.e. bull call spread). At expiration the stock price equals $279. What is your profit or loss (on a per share basis)?

C) A profit of $2

At price of $279 Option 1 will get exercised and option 2 will get lapsed.

Profit or loss = Option 1 Profit/Loss + Option 2 Profit/Loss

Profit or loss = 279 - 275 - 9 + 7

Profit = $2

3. Suppose you purchase Option 1 and also purchase Option 2. What is your breakeven stock price (on a per share basis) at expiration?

B) $285.50

Breakeven price = Profit of $0

at $284 Profit from Option = 0 and Loss from Option 2 = 3

at $285.50 Profit from Option = 1.50 and Loss from Option 2 = 1.50

Thus at $285.50 the profit from both options are net zero

Please upvote if satisfied

jeff jeffy answered 1 year ago

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