Question

1.You sell an October 2020 put option on 3M Corporation with an exercise price of $130. If, at expiration, 3M is trading at $110 per share, which one of below answers is the most correct?

a)I will exercise my option to sell the stock for $130.

b)I will have to buy the stock for $130.

c)I will have to sell the stock for $130.

2.You buy a July 2022 call option on ABC Inc. with an exercise price of $25 for a call premium of $7.00. If at expiration the stock price is $31.5, will you exercise? Choose the most correct answer.

a) Yes, I will exercise because the payoff is positive: $31.5-$25=$6.5

b) No, I will not exercise because the payoff is negative: $25-$31.5= - $6.5

c) No, I will not exercise because the profit is negative: $31.5-$25-$7= - $0.5

d) Yes, I will exercise because the profit is positive: $25-$31.5+$7=$0.5

3.You purchase an IBM put option with an exercise price of $100, where the put price is $1.25. What is your payoff and profit if the stock price turns out to be $110 at expiration?

a)Payoff is $0, profit is -$1.25

b)Payoff is $0, profit is $1.25

c)Payoff is $10, profit is $8.75

d)Payoff is -$10, profit is -$11.25

4.You purchase an IBM put option with an exercise price of $100, where the put price is $1.25. What is your payoff and profit if the stock price turns out to be $90 at expiration?

a) Payoff is $10, profit is $8.75.

b) Payoff is 0, profit is -$1.25.

c) Payoff is -$10, profit is -$8.75.

d) Payoff is -$10, profit is -$11.25

Answer 1

1.
a)I will exercise my option to sell the stock for $130.

2.
a) Yes, I will exercise because the payoff is positive: $31.5-$25=$6.5

3.
a) Payoff is $0, profit is -$1.25

4.
a) Payoff is $10, profit is $8.75.