Question

Options

Homework

1. Graph a call option.  Make sure you put the price of the stock on the x axis and the change in wealth on the y axis.  There is no such thing as a negative stock price so the y axis does not split the x axis into positive and negative.  Here are the variables to use:  Stock price is currently at $13; stock strike price is $18; the premium is $20.  Make sure you label the change in wealth for the buyer and writer (seller), the out-of-the-money area, in-the-money area and the breakeven point.   

2. Graph a put option.  Make sure you put the price of the stock on the x axis and the change in wealth on the y axis.  There is no such thing as a negative stock price so the y axis does not split the x axis into positive and negative.  Here are the variables to use:  Stock price is currently at $42; stock strike price is $36; the premium is $.55.  Make sure you label the change in wealth for the buyer and writer (seller), the out-of-the-money area, in-the-money area and the breakeven point.   

3. A call option has the following variables:  The current stock price is $69; the strike price is $63; the call premium is $.70.  Would the buyer exercise the call?  If so, what is the profit or loss for the call buyer?  What is the profit or loss for the writer of the call?

4. A call option has the following variables:  The current stock price is $93; the strike price is $98; the call premium is $.70.   Would the buyer exercise the option?  If so what is the profit or loss for the call buyer?  What is the profit or loss for the writer of the call?

5. A put option has the following variables:  The current stock price is $47; the strike price is $46.50; the put premium is $.6  Would the buyer exercise the option? If so, what is the profit or loss for the put buyer?  What is the profit or loss for the writer of the put?

6. A put option has the following variables:  The current stock price is $19; the strike price is $22; the put premium is $.50.  Would the buyer exercise the option? If so what is the profit or loss for the put buyer.  What is the profit or loss for the writer of the put?

Answer 1

1. Attached diagram 1.

Stock price	13
Strike price	18
Premium	1.2

So this call option OTM. Breakeven point= Strike price+premium = 19.2

P/L for buyer = -1.2

P/L for seller = +1.2

2.

Attached diagram 2.

Stock price	42
Strike price	36
Premium	0.55

So this put option is OTM. Breakeven point= Strike price - premium = 36 -0.55 = 35.45

P/L for buyer = -0.55

P/L for seller = +0.55

3.

Stock price	69
Strike price	63
Premium	0.70

Yes, the buyer would excercise the call. As the current market price is greater than the strike price and this is a call option (right to buy) so the buyer would excercise his right to buy from the option writer at 63 ans will not buy from the market priced at 69.

As the buyer excercised his right to buy from the writer, buyer saves $6 per option. But buyer has already paid 0.70 as premium. So,the net profit for the call buyer is 69-63-0.7 = 5.3

The seller has to buy the undelying from the market at $69 and sell it to the buyer at $63. So there is a straight loss of $6. However the seller has already got the premium so net loss = 63-69+0.7 = -5.3

4.

Stock price	93
Strike price	98
Premium	0.70

No, the buyer would not excercise the call. As the current market price is lesser than the strike price and this is a call option (right to buy) so the buyer can buy the underlying from the market at $93, instead of paying $98 to the writer.

As the buyer has not excercised his right to buy from the writer. But buyer has already paid 0.70 as premium. So,the net loss for the call buyer is -0.70.

The seller has got the premium and he dont have to buy the underlying from the market. So the net profit for him = 0.70