Question

In: Finance

Suppose that you buy a six-month call option on stock Y with an exercise price of...

Suppose that you buy a six-month call option on stock Y with an exercise price of $80 and sell a six-month call option on Y with an exercise price of $120. Draw a position diagram showing the payoffs when the options expire. (Hint: Determine and then add up the values of the two options given different share prices.)

Solutions

Expert Solution

Payoff from call option if stock price is more than the strike price = Stock price – Strike price

Payoff from call option if stock price is less than the strike price = 0

Therefore, Payoff table:

Stock Price (assumed price at the time of expire)

Payoff (from buying a call option of strike price $80)

Payoff (from selling a call option of strike price $120)

Profit (payoff 1 + Payoff 2)

$50

$0

$0

$0 + $0 = $0

$60

$0

$0

$0 + $0 = $0

$70

$0

$0

$0 + $0 = $0

$80

$0

$0

$0 + $0 = $0

$90

+$10

$0

$10 + $0 = $10

$100

+$20

$0

$20 + $0 = $20

$110

+$30

$0

$30 + $0 = $30

$120

+$40

$0

$40 + $0 = $40

$130

+$50

-$10

$50 - $10 = $40

$140

+$60

-$20

$60 - $20 = $40

Position diagram

Therefore Minimum profit is $0 and maximum profit is $40.

jeff jeffy answered 11 months ago
Next > < Previous

Related Solutions

The price of a stock is $36. You can buy a six-month call option with $33...
The price of a stock is $36. You can buy a six-month call option with $33 exercise price for $3.2 or a six-month put option with $33 exercise price for $1.2. (a) What is the intrinsic value of the call option? (b) What is the intrinsic value of the put option? (c) What is the time premium paid for the call option? (d) What is the time premium paid for the put option? (e) If the price of the stock...
You buy a share of BP stock for 150, and a six-month call option at 160...
You buy a share of BP stock for 150, and a six-month call option at 160 for 9.83. You sell a six month put option at 150 for 11.12.   You hold your portfolio until the expiration date. On the expiration date you cash out your portfolio. Graph the profits of your strategy as the price of BP stock at the expiration date goes from 125 to 200. Profits equal the amount you receive at the expiration date for cashing out...
3. A six-month call option is the right to buy stock at $30. Currently, the stock...
3. A six-month call option is the right to buy stock at $30. Currently, the stock is selling for $32 and the call is selling for $3. You are considering buying 100 shares of the stock ($3,000) or one call option ($300). a) If the price of the stock rises to $39 within six months, what would be the profits or losses on each position? What would be the percentage gains or losses? b) If the price of the stock...
What is the price of a six-month European call option on a stock expected to pay...
What is the price of a six-month European call option on a stock expected to pay a dividend of $1.50 in two months when the stock price is $50, the strike price is $50, the risk-free interest rate is 5% per annum and the volatility is 30% p.a.? Show all working.
What is the price of a six-month European call option on a stock expected to pay...
What is the price of a six-month European call option on a stock expected to pay a dividend of $1.50 in two months when the stock price is $50, the strike price is $50, the risk-free interest rate is 5% per annum and the volatility is 30% p.a.? Show all working.
Suppose that a 6-month European call A option on a stock with a strike price of...
Suppose that a 6-month European call A option on a stock with a strike price of $75 costs $5 and is held until maturity, and 6-month European call B option on a stock with a strike price of $80 costs $3 and is held until maturity. The underlying stock price is $73 with a volatility of 15%. Risk-free interest rates (all maturities) are 10% per annum with continuous compounding. (a) Construct a butterfly spread with the two kinds of options....
Suppose that a 6-month European call A option on a stock with a strike price of...
Suppose that a 6-month European call A option on a stock with a strike price of $75 costs $5 and is held until maturity, and 6-month European call B option on a stock with a strike price of $80 costs $3 and is held until maturity. The underlying stock price is $73 with a volatility of 15%. Risk-free interest rates (all maturities) are 10% per annum with continuous compounding. (a) Construct a butterfly spread with the two kinds of options....
Suppose that an investor has wrote a six month European call option on Dawn stock, a...
Suppose that an investor has wrote a six month European call option on Dawn stock, a hypothetical company, with strike price of $40 for a price of $2.what happens to the option price of volatility on Dawns stock decreases? 1.option price will remain unaffected 2.option price will be more than 1.5$ 3.option price will be less than 2$ 4.none of the above
A. A six-month S&P 500 index call option has an exercise price of 1,500. The holder...
A. A six-month S&P 500 index call option has an exercise price of 1,500. The holder of the option exercises the call when the index is at 1,520. The settlement procedure for the S&P 500 index option requires the writer of the option to ____________ to the holder of the option. a. deliver an S&P 500 index ETF b. make a payment of 20 times $100 c. make a payment of $1,520 d. make a payment of 1,520 times $10...
A particular call is the option to buy stock at $35. It expires in six months...
A particular call is the option to buy stock at $35. It expires in six months and currently sells for $6 when the price of the stock is $36. a) What is the intrinsic value of the call? What is the time premium paid for the call? b) What will the value of this call be after six months if the price of the stock is $29, $35, $39, and $50, respectively? c) If the price of the stock rises...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT