Question

You want to speculate on an upcoming product announcement from a major tech firm. You have decided that the best way to speculate, given the situation and your confidence level, is with options. Information is given below concerning the current stock price and option contracts. You have decided to purchase one put contract and one call contract with the same expiration date and strike price. So, you will be long two contracts total. 6 7 Analyze the information below, then answer the questions 10 11 12 13 Stock Price 333.00 Strike Price (both options) 14 332.50 Show your work (if necessary) below this box. Make sure it is well formatted and documented if you want it to count towards partial credit. Call Premium 15 14.00 16 Put Premium 13.00 17 18 Questions: 1. What are the break-even points of your positition? 19 20 21 22 2. What will your total profit on the position be if the firm's share price ends up at $400? 23 24 25 26 27 3. What will your total profit on the position be if the Instructions Score Sheet Short Answer Essays Hedging Options WACC Valuation Tools +

Answer 1

Total cost of this position = $(14+13) = $27

Strike price of the option = 332.5

1)

Hence, break-even points of the position are as follows :-

Break-even price on the upside = (332.5 + 27) = 359.5

Break-even price on the downside = (332.5 - 27) = 305.5

2)

Profit from the position will be calculated by subtracting the closing price with the respective break-even price

Hence, profit if share price ends up at $400 = (400 - 359.5) = 40.5

3)

If share price ends up at $330, the position will result in a loss.

Total loss will be as follows :-

Since, closing price of 330< Strike price of 332.50, the call will expire worthless

Pay-off from Put will be = $ (332.50 - 330) = $2.50

Hence, total loss = $ (27 - 2.50) = $24.50

4)

Total Profit if stock closes at $275 = $ (305.5 - 275) = $30.5

5)

Total point of the option position = $(14+13) = $27