Question

00 View By Expiration: May 12 Jun 12 Aug 12 Nov 12 Jan 13 Jan 14 Call Options Expire at close Friday, January 18, 2013 Strike Symbol Last Chg Bid Ask Vol Open Int 25.00 JCP130119C00025000 12.00 0.00 11.55 11.70 9 4,148 30.00 JCP130119C00030000 8.39 0.00 7.75 7.85 1,849 33.00 JCP130119C00033000 6.35 0.00 5.80 5.90 96 34.00 JCP130119C00034000 5.05 0.00 5.25 5.35 16 35.00 JCP130119C00035000 4.60 0.60 4.70 4.80 145 3,467 36.00 JCP130119C00036000 4.40 0.00 4.20 4.35 9 37.00 JCP130119C00037000 4.10 0.00 3.75 3.85 2 1.611 38.00 JCP130119000038000 3.15 0.00 3.30 3.45 40.00 JCP130119C00040000 2.92 0.00 2.61 2.69 6 1,784 14 7

Assume you purchased the right to sell 3,400 shares of JC Penney stock in January 2013 at a strike price of $33 per share. Suppose the stock sells for $29.46 per share immediately before your options’ expiration. What is the rate of return on your investment? What is your rate of return if the stock sells for $35.15 per share? (Enter the rates of return for the 3-month period.) (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

      

Return on investment at $29.46	%
Return on investment at $35.15	%

Answer 1

Date of Purchase Strike Price Lot size Jan-13 33 $ 3400 Shares Situation 1 Situation 2 Expiry Price 29.46 $ Expiry Price 35.15 $ To find: rates of return for the 3-month period Question Insight The Question deals with Right to Sell a particular shares i.e it deals with PUT OPTION (Derivative product ). Put Option is an option to sell assets at an agreed price on or before a particular date. Put option premium from table Therefore Premium paid for buying the put option is 3.35/ share i.e the ASK Rate Total investment = 3.35*3400 33.00 JCP130119P00033000 3.05 0.00 3.25 3.35 2 11390 97 Solution 1 Calculating Gain / Loss on expiration = ((Strike price - Option premium) - Expiry price) =(( 33 - 3.35)-29.46) =0.49 /share Solution 2 Calculating Gain / Loss on expiration = ((Strike price - Option premium) - Expiry price) =(( 33 - 3.35)-35.15) = -5.5 However, this loss will be limited to premium paid i.e 3.35/share Gain = 0.19*3400 = $646 Loss = 3.35*3400 = $11390 Rate of return for the 3-month period = (return/investment)*100 = (646/11390)*100 = 5.67% Rate of return for the 3-month period = (return/investment )*100*3/12 = (-10370/10370)*100 = -100%