Question

Use the following quotes for JCPenney stock options: November 27, 2015 In The Money List Straddle Lookup Option Calls Strike Fiter Contract Name Bid Implied Last Ask Change %Change Volume Open Interest Volatility 8.00 1.62 1.89 0.00 0.00% 20 56.45% 9.00 0.98 0.00% 51.95% 9.50 0.74 1.79 1.00 0.69 0.44 0.26 0.00% JCP151127C00008000 JCP151127C00009000 JCP151127C00009500 JCP151127C00010000 JCP151127C00010500 JCP151127C00011000 50.00% 10.00 1.10 0.78 0.48 0.29 0.18 0.00 0.00 0.00 0.03 -0.01 0.00% 0.40 0.28 0.16 45.12% 10.50 12.00% 43.75% 11.00 0.15 -5.88% 44.34% Puts Strike Fiter Contract Name Last Bid Ask Change %Change Volume Open Interest Implied Volatility 7.00 JCP151127P00007000 0.06 0.00% 24 67.58% 8.50 JCP151127P00008500 0.31 0.00% 53.13% 0.03 0.18 0.29 0.47 0.08 0.21 0.33 0.50 0.00 0.00 0.00 0.00 0.00% 50.20% 9.00 9.50 JCP151127P00009000 JCP151127P00009500 0.41 0.65 10 83 0.00% 49.22% Assume you purchased the right to sell 2,500 shares of JCPenney stock in November 2015 at a strike price of $7.00 per share. Suppose the stock sells for $6.50 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 $8.00 per share? Assume your holding period for this investment is exactly three months. (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your 3-month returns as a percent rounded to 2 decimal places.)

Answer 1

The right to sell can be purchased by purchasing the put option of strike price of $7.00  

From the first row of put option, the last price is 0.06, So the option can be purchased at a price pf $0.06 per share  

Just before expiration, the time value of this option will be zero and the put option will now be priced equal to

max (strike price - market price, 0)

=max(7 -6.5 , 0) = $ 0.5

So, the return on investment is = profit/purchase price = (0.5-0.06)/0.06 =7.33 = 733.33% for 3 months

If the stock price is $8.00 , option price will be

max (7-8,0) = 0

So, the return on investment is = profit/purchase price = (0-0.06)/0.06 = - 1 = -100% for 3 months