Question

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114, and the size of each contract is 100 shares.

Calls Puts Option and TSX Close Macrosoft Expiration February March May August Strike Price 110 110 110 110 Vol. Last Vol. 857.6040 61 8.80 22 22 10.25 11 3 13.05 3 Last 0.60 1.55 2.85 4.70

a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring commissions?

b-1. Suppose you buy 10 contracts of the February 110 call option and also suppose that Macrosoft stock is selling for $140 per share on the expiration date. How much is your options investment worth?

b-2. Suppose you buy 10 contracts of the February 110 call option and also suppose that Macrosoft stock is selling for $125 per share on the expiration date. How much is your options investment worth?

c-1. Suppose you buy 10 contracts of the August 110 put option. What is your maximum gain?

c-2. Suppose you buy 10 contracts of the August 110 put option. On the expiration date, Macrosoft is selling for $104 per share. How much is your options investment worth?

c-3. Suppose you buy 10 contracts of the August 110 put option. On the expiration date, Macrosoft is selling for $104 per share. What is your net gain?

d-1. Suppose you sell 10 of the August 110 put contracts. What is your net gain or loss if Macrosoft is selling for $103 at expiration? For $132?

d-2. Suppose you sell 10 of the August 110 put contracts. What is the break-even price—that is, the terminal stock price at expiration that results in a zero profit?

Answer 1

You have asked a question with multiple sub parts, in the same post. I have addressed the first four. Please post the balance sub parts separately.

N = Number of contracts; A = Size of contract = 100; K = Strike price of the option; S = Price of the stock o the expiration date; C = Call premium; P = Put premium

Part (a)

N = 10; A = 100; X = 110; C = Last traded price of the February 110 call option = 7.60

Hence, amount you will pay = N x A x C = 10 x 100 x 7.60 = $ 7,600

Part (b - 1)

N = 10; A = 100; X = 110; S = $140 per share

Worth of options investment = N x A x max (S - X, 0) = 10 x 100 x max (140 - 110, 0) = $ 30,000

Part (b - 2)

N = 10; A = 100; X = 110; S = $125 per share

Worth of options investment = N x A x max (S - X, 0) = 10 x 100 x max (125 - 110, 0) = $ 15,000

Part (c - 1)

N = 10; A = 100; X = 110; P = Last traded price of the February 110 call option = 4.70

Hence, your maximum gain = N x A x [max (X - S, 0) - P] = 10 x 100 x [max (110 - S, 0) - 4.70] = 1,000 x max (110 - S, 0) - 4,700

The gain will be maximum when S = 0 and the maximum gain = 1,000 x max (110 - 0, 0) - 4,700 = 1,000 x 110 - 4,700 = $  105,300