Question

For all call and put options, answer questions based on per share price, per share premium, and etc. Please be aware that the first question is asking from the buyer of the call option's point of view and the second question is asking from the seller of the put option's point of view. Answering the questions from the wrong perspective will not be granted most of credits. 2. The market price for Alibaba Group Holding Limited. (Ticker: BABA) was $198.74 when Mary sold a put option today. The put premium is $8.45 and the exercise price is $185. The option will be expired on May 15, 2020. (12.5 points) a. Draw the contingency graph for Mary. Label each point/interaction on the graph. (3.5 pts) b. What is the break-even point for Mary? (1.5 pts) e. What are Mary's maximum profit and maximum loss? (3 pts) d. Show the profit/loss for Mary if, at the expiration date, the BABA price is (I) $175, (2) $181, and (3) $250.(4.5 pts)

Answer 1

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06:06 ' vo a dx 2 ENG , 31-03-2020 ... o X T52 X fc S U V W X Y Z AA AB AC AD AE AF A 29 30 31 32 33 a short put writer/seller of a put option 34 35 36 stock price = 198.74 exercise price = put option premium received 185 37 8.45 CONTINGENCY GRAPH 38 price 150 160 50 100 150 200 250 300 43. 170 176.55 181 185 PROFIT -26.55 -16.55 -6.55 0 4.45 8.45 8.45 8.45 8.45 8.45 PROFIT 45 176.55 = BREAK EVEN POINT 200 210 220 a 250 PRICE 51 52 Sheet1 Sheet2 Sheet3 +

06:08 E ' vo a dx 2 ENG , 31-03-2020 ... o X AA54 x ✓ fox R. T U V W X Y Z AA AB AC AD AE AF A 52 53 FOR WRITER OF A PUT OPTION PREMIUM RECEIVED IS THE MAXIMUM INCOME 54 55 56 HERE PREMIUM RECEIVED = 8.45 [MAXIMUM INCOME] 57 58 59 WRITER WILL HAVE ZERO PAYOFF IF PRICE ON EXPIRY IS ABOVE EXERCISE PRICE OTHERWISE NEGATIVE PAYOFF PAYOFF = PRICE ON EXPIRY - EXERCISE PRICE PROFIT = PREMIUM RECEIVED - PAYOFF 61 62 63 b 64 65 BREAK EVEN POINT = EXERCISE PRICE - PREMIUM RECEIVED BREAK EVEN POINT = 185 - 8.45 = 176.55 66 C 67 MAXIMUM PROFIT = PREMIUM RECEIVED = 8.45 MAXIMUM LOSS IS WHEN PRICE = 0 MAXIMUM LOSS = PRICE ON EXPIRY - EXERCISE PRICE + PREMIUM RECEIVED = 0 - 185 +8.45 = -176.55 MAXIMUM LOSS = 176.55 69 70 71 d 72 73 74 75 PROFIT/LOSS AT PRICE = 175 PROFIT/LOSS AT PRICE = 181 PROFIT/LOSS AT PRICE = 250 PROFIT/LOSS = 175 - 185 + 8.45 = -1.55 PROFIT/LOSS = 181 - 185 + 8.45 = 4.45 PROFIT/LOSS = 0 + 8.45 = 8.45 (PAYOFF ZERO AS PRICE ON EXPIRY IS HIGHER THAN STRIKE PRICE] Sheet1 Sheet2 Sheet3 =