Question

The first few answers are complete. Please answer the last couple.

Using the Black/Scholes Option Pricing Model, calculate the value of the call option given:

S= 85; X=95; T=6 months; Standard Dev.=0.6; Rf=10%

What is the intrinsic value of the call?_____$10________

If the exercise price would decrease, the value of the call would __increase_________?

If the time to maturity were 3-months instead of six months, the value of the call would _$7.20__________?

If the stock price where $65, the value of the call would __$4.02_________?

What is the maximum value and minimum value that a call can take? Why?

What increase in price does the stock have to achieve in order to break-even? ___________

What is the time value of the call option?____________

If you buy a bottom-straddle what strategy are you trying to use?

Answer 1

The maximum value that a call can take is the current valueof the underlying asset(share in this case) . As the gain on a call can be infinite based on the call value.

The minimum value that a call can take is 0(zero)since an option cannot be sold for negative amount of money.

Break even price is the stockprice at which investors can choose to exercise or dispose of the contract without incurring a loss. so, the price that has to be increased in order to break even is the call value .

Time value of an option is the premium a rational investor would pay over its current value based on the probability that it will increase in value before expiry.It is calculated by finding the difference between the option premium and intrinsic value of the call option.

The strategy that must be used is to buy calland put options at the same exercise price and epiration time.It may result in profits or losses deppending on the price difference at current price and the price at expiry.The strategy to be kept in mind is that there must be enough time to expiry.The idea is to benefit when there are high/low price variations so that the new values of call/out options are far greater than the values when such strategy was started.But a straddle strategy is not a risk free proposition and can fail in a dull market.one must look at the volatility in the amrket to determine the best time to buy or sell options.