Question

1. Consider the Intel example from the in-class example (handout posted in Canvas). A naive investor wants to try to make money on Intel stock by safeguarding against changes in the market. This investor instructs the broker to buy one June call option (i.e., 100 shares) at $22.50 and purchase one June put option at $20.00. (a) Scenario 3: If the price of the stock is worth $25 at the June expiration date, what profit/loss was incurred by the investor? (b) Scenario 4: If the stock is worth $15 at the June expiration date, what profit/loss was incurred? (c) Scenario 5: If the stock is worth $21 at the June expiration, what profit/loss was incurred? (d) When does it make sense to act in the manner of the naive investor?

Answer 1

in this case premium paid for buying these option is not given

so net profit calculation not possible

please the solution below

Scenarios	Particular's	Stock price June end	Call option	Put option	Profit/loss		Profit/loss for 100 Share	Remarks
			22.5	20
Scenario 3	Price of stock	25	Exercise	not exercise	2.5	(25-22.5)	250	Buy at 22.5 and sell at 25
Scenario 4	Price of stock	15	not exercise	Exercise	5	(20-15)	500	buy at 15 and sell at 20
Scenario 4	Price of stock	21	not exercise	not exercise	0		0	Profit making not possible