Question

A stock has a spot price of $27. Its March options are about to expire. One of its puts is worth $4 and one of its calls is worth $2. The exercise price of the put must be and the exercise price of the call must be Select one: a. One cannot tell from the information given. b. $29; $23 1 c. $25; $31 O d. $31; $25 e. $23; $29

Answer 1

1]

A call option has a positive value at expiration if stock price > exercise price. A call option with positive value at expiration is in-the-money.

Value of in-the-money call option at expiration = stock price - exercise price

$2 = $27 - exercise price

exercise price = $25

A put option has a positive value at expiration if stock price < exercise price. A put option with positive value at expiration is in-the-money.

Value of in-the-money put option at expiration = exercise price - stock price

$4 = exercise price - $27

exercise price = $31

The answer is (d)

2]

Profit of a long put option = Max[X-S, 0] - P

S = underlying price at expiry,

X = strike price

P = premium paid

Profit =  Max[X-S, 0] - P

Profit =  Max[455-430, 0] - 20.43

Profit = $4.57

The contract size is 100 shares per contract

Profit = $4.57 * 100 = $457

The answer is (e)