The following option prices were observed for a stock (non-dividend) for July 6 of a particular...

The following option prices were observed for a stock (non-dividend) for July 6 of a

particular year.

The stock is priced today at $165.13/ share. Assume interest rate=0%

The options are European.

In the following problems, determine the profits for possible stock prices of

$150, 155, 160, 165, 170, 175, and 180. Answer any other questions as requested.

Call Premium Put Premium

Strike | Aug |Oct |Aug |Oct

$165| $5.25| $8.1 |$4.75| $6.75

Short one October 165 put contract. Hold it until the option expires. Determine the profits and graph the results. Identify the break-even stock price at expiration. What is the maximum gain and loss on this transaction?

Solutions

Expert Solution

=> Premium for put option with strike price of $ 165 which is expiring at October is given as $ 6.75 and it is also given that the option is European ( which mean we can only exercise the option at the expiry ) and current stock price = $ 165.13

* Here we are shorting the put option, so we well have that premium of $ 6.75 credited.

* In case of shorting a put option the maximum profit will be the premium ( here it is 6.75) and maximum loss is unlimited.

* We can find the break even stock price by subtracting premium amount from the strike price:

Formula used in excel:

jeff jeffy answered 2 years ago

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