Question

Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months.

a. What will be the profit to an investor who buys the call for $4.8 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 1 decimal place.)

b. What will be the profit to an investor who buys the put for $7.5 in the following scenarios for stock prices in 6 months? (i) $40; (ii) $45; (iii) $50; (iv) $55; (v) $60. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your ans

Answer 1

a. Both call and put have strike price os $50,

(i) Loss of $4.8 as the stock price is below the strike price as a result the call option will not be exercised. The investor will lose the amount of premium paid.

(ii) Loss of $4.8 as the stock price is below the strike price as a result the call option will not be exercised. The investor will lose the amount of premium paid.

(iii) Again a loss of $4.8 as the option is at the money and expires without any profit to the investor.

(iv) $55 : $55 - $50 - $4.8

= $0.2. here the investor gains $0.2

(v) $60 - $50 - $4.8

= $5.2

b. The put option :

(i) $50 - $40 - $7.5

= $2.5 profit

(ii) $50 - $45 - $7.5

= -$2.5. The investor loses $2.5 after exercising the put option.

(iii) $50 - $50 - $7.5

= - $7.5 . the investor loses $7.5 due to the optiob being at the money.

(iv) loss of $7.5 as the stock price is above the strike price.

(v) A loss of $7.5, as the stock price is above the strike price.