Question

Use data from the following table to answer questions 1, 2, and 3.

Option Quote
		Call			Put
Expiration	Strike	Last	Volume	Open Interest	Last	Volume	Open Interest
Jan	190	4.40	815	5697	1.75	507	2496
Feb	190	6.75	402	2808	3.00	3553	10377
Apr	190	8.85	107	1866	5.20	527	2177
Jul	190	10.95	15	645	8.54	6	1142
Jan	195	0.01	2451	11718	0.70	4090	8862
Feb	195	3.65	1337	11902	5.00	860	3156
Apr	195	5.90	1785	2928	7.30	934	1141
Jul	195	8.45	13	5773	10.85	22	3419
Jan	200	1.10	1248	2966	5.55	637	6199
Feb	200	1.61	1053	5530	8.09	546	967
Apr	200	3.70	629	3236	10.05	375	1903
Jul	200	6.10	80	1257	--	--	1105

1. Calculate the payoff and profit at expiration for the February 190 calls, if you purchase the option at the stated price and at expiration the stock price is $195.
2. Calculate the payoff and profit at expiration for the February 195 puts, if you purchase the option at the stated price and at expiration the stock price is $195.
3. Calculate the payoff and profit at expiration for the February 200 calls, if you purchase the option at the stated price and at expiration the stock price is $203.

Answer 1

Answer:

The value of call increases when the underlying price increases and vice versa.

The value of put premium increases when underlying market decreases and vice versa.

The value of a call = Spot price - strike price (minimum zero)

The value of a put = Strike price - spot price (minimum zero)

1. Trade: Buy February Call   

Strike Price: $ 190

Call Premium paid: $ 6.75

Stock Price on Expiry: $ 195

Value of call on expiry: $ 5

Net Payoff: -6.75+5 = - 1.75

2. Trade: Buy February Put

Strike Price: $195

Put Premium: $ 5.00

Stock Price on Expiry = $ 195

Value of Put on Expiry: 0

Net payoff : -5

3. Trade: Purchase February Call

Call Strike Price: $200

Call Premium: $ 1.61

Stock Price on Expiry: $ 203

Value of Call on Expiry: $3

Net Payoff: -1.61+3 = $1.39