Question

You write a put on Kane with an exercise price of $3.50 and a premium of $1.25. At the same time you buy a call on Kane with an exercise price also at $3.50 and a premium of $1.25. Calculate the profit or loss on both positions simultaneously if just prior to option expiration Kane's stock price is $3.00. a. ($0.50) b. ($1.25) c. $0.0 O d. ($1.75) e. ($0.75)

Answer 1

Writing a put option with an exercise price = $3.50

Premium = $1.25

Expiration price = $3

the buyer of put option will be exercised so, writer will lose $0.50

Premium will be its gain = $1.25

Net gain = $0.75.

2) purchased a call option

Option will be lapsed as Expiration price is lesser than strike price

Gross payoff $0

Premium paid = ($1.25)

Net payoff = ($1.25)

Ne loss = ($1.25) + $0.75

Ne loss = ($0.50)

Option 'A' is correct