Question

1. (10 pts)  I buy one CALL option on AMD with a strike price of $20.50.The option premium is $100. Suppose the price of AMD is $35.00 a share and I choose to exercise the option. What are my total gains or losses?

2. (10 pts) Using the information in question 6, what would my profit or loss be if I exercise the option when AMD has a market price of $21.00 per share?

3. (10 pts) I buy one PUT option on Walmart with a strike price of $94.The option premium is $1.14. Suppose the price of Walmart is $91.50 a share and I choose to exercise the option. What are my total gains or losses?

4. (5 pts) Using the information in question 8, what would my profit or loss be if I exercise the option when Walmart has a market price of $93.75 per share?

5. (5 pts)  If I sell a CALL on Coke, which of the following is true? (assume I am rational)
   1. I expect that Coke stock price will decline
   2. I expect Coke stock price to  increase
   3. This cannot be answered without knowing the strike price
   4. This cannot be answered without knowing the option premium

Answer 1

The strike price on the call option is $20.5. Now, as i have bough a call option i would want the share price to rise in order to gain from the position. The share price of AMD has risen to $35.

The gains and losses are = ( $35 - $20.5 - option premium paid )

= ($35 - $20.5 - $100)

=-$85.5

Now, as the share price has fallen to $21, the call option expires worthless and i lose the amount of premium paid which is $100.So, the total loss on the position is $100.

I have bought a put option, the strike price of the option is $94. Now, as i have bought a put option i would gain if the stock price falls, the stock price has fallen to $91.5

So, the gain is = ( $94 - $91.5 - $1.14)

= $1.36

As the stock price is $93.75, the put option holder will exercise the put option and will lose the amount of

= ($94 - $93.75 - $1.14)

= - $0.89

So,i will lose the amount of - $0.89

If i have sold a call option on COKE , the i expect the stock price to fall. In case the stock price really falls, the call option holder will not exercise the option and will gain the premium paid to me by the buyer of the call option.

So, the correct option is option A.