Question

Now let's say you believe EFG stock will increase in price of $50 share. so you decide to purchase a lune Call option for 100 shares for a 30 day time limit. Assume that I call option contract equals to 100 shares and the call premium per share is $2/share. (6 points total) a) Are you the long call or short call option? are you the buyer or seller? b) How much will you spend for the entire call option contract? Assume the price of the share increased to S70 per share, e) Would you exercise the call option? d) How much would be your gain or loss? Assume the price of the share decreased to $30 per share. e) Would you excrcise the call option? How much would be your gain or loss? 3) Now let's say you believe LMN stock will decrease in price of $50/share, so you decide to purchase a June Put option for 100 shares for a 30 day time limit. Assume that buy 1 option contract, where I put option contract equals to 100 shares and the put premium cost per share is S4/share. (6 points total) a) Are you the long call or short put option? Are you the buyer or seller? b) How much will you spend for the entire put option contract? Assume the price of the share increased to S56 per share, c) Would you exercise the put option? d) How much would be your gain or loss? Assume the price of the share decreased to $40 per share, e) Would you exercise the put option? How much would be your gain or loss? 4) Consider the OPO company value before trading at $30/share. Let's assume you own the stock. (5 points) a) If you assume that the price will not go above $35. you decide to sell the call option at a price of S35, are you the long or short position? b) Assume the call premium is worth $1.00 per share and each contract is made up of 100 shares. how much would you receive to cover 100 shares? c) If the value of the shares only increases up to $33, will the other party exercise the call option? will you receive any profit if you in the short position d) If the value of the shares goes up to $35. how much profit will you receive if you are the short position? Assume the other counterparty doesn't exercise the option unless the profit is over e) If the value of the shares goes above $35, will you receive any additional profit?

Answer 1

Ans - PART (A)

1. Purchase of call is known as long call. The buyer of the option purchase the call option

2. cost = total shares * premium

= 100 * 2

= $200

IF PRICE INCREASE TO 70

1. Yes, as the spot price is more than strike price , so we can exercise this option.

2. Payoff = Max [0, strike price/ exercise price- spot price]

= max [0, 70- 50]

= 20

Gain = payoff ( sale ) - cost of premium

= 20 - 2

= $18 per share

or 18 * 100

= $1800

IF PRICE DECREASE TO 30

1. No, we should not exercise this option as spot price is less than strike price.

2. Payoff = Max [0, spot price - strike price/ exercise price]

= max [0, 30- 50]

= 0

loss = payoff ( sale ) - cost of premium

= 0 - 2

= - $2 per share

or -2 * 100

= - $200

PART(B)

1. Purchase of put is known as long put. The buyer of the option purchase the put option.

2. cost = total shares * premium

= 100 * 4

= $400

IF PRICE INCREASED TO $56

1. No, we should not exercise this option as strike price is less than spot price

2. Payoff = Max [ 0, strike price - spot price]

= max [0 , 50-56]

= 0

loss = payoff ( sale ) - cost of premium

= 0 - 4

= - $4 per share

or -4 * 100

= - $400

IF THE PRICE DECREASED TO $40

1. Yes, as the strike price is more than spot price , so we can exercise this option.

2. Payoff = Max [ 0, strike price - spot price]

= max [0 , 50-40]

= 10

Gain = payoff ( sale ) - cost of premium

= 10 - 4

= $ 6 per share

or 6 * 100

= $600

PART(C)

1. Selling of call option is known as short position

2. Selling of call option is a reward to option writer

= 100 shares * $1

= $1000

3. Yes, because spot price is more than strike price

2. Payoff = MIN [0, strike price/ exercise price- spot price]

= max [0, 33- 30]

= 3

loss= payoff ( sale ) - premium receives

= 3 - 1

= -$2 per share

or -2* 100

= -$200

An option seller sells the option in a reference that price will not go up. But in this case the price went upto 3 per share but he is cover upto 1 per share and making a loss of $2 per share

4. There is a loss of $5 per share and seller of an option receives the option $1 per share

so total loss of $4 per share

5. NO, rather he is making a loss of $ 5 per share excluding premium received and net $4 per share loss