Question

Q1-1. (Rights to purchase assets) You are interested in buying a stock of Apple in one year. Today, Apple 's stock is traded at $165.24 per share. Suppose that there is something called “Call option”. If you purchase this call option you have a right to purchase the Apple's stock in one-year at $165.24 per share for sure (But you do not have to make the purchase in one year if you do not want). Therefore, you can lock-in the stock price in one year from today. You found out that this call option is traded at $165.24 for one share of Apple's stock in one-year. Is there any strategy that you can make profit from this situation? Assume that you can buy or sell this call option. Q1-2. (Rights to purchase assets) Suppose that the call option price is $0 above. Is there any strategy that you can make profit from this situation? Assume that you can buy or sell this call option.

This is the complete question. Please help me answer both questions 1-1 & 1-2. They come together. Thank you very much!!

Answer 1

1-1]

Buying the option

The option is bought at a price of $165.24 (option premium). By holding this option, you have the right to purchase one share of Apple stock at $165.24 (strike price).

Breakeven price of a bought call option = strike price + option premium = $165.24 + $165.24 = $330.48.

If the price of Apple stock is more than $330.48 in one year, you will make a profit.

For example, if the price of Apple stock in one year is $400, then the stock can be bought at $165.24 and sold in the market for $400.

Profit = (sale price of stock - purchase price of stock - premium paid)

Profit = ($400 - $165.24 - $165.24) = $69.52

Selling the option

The option is sold at a price of $165.24 (option premium). By selling this option, the buyer of the option has the right to purchase one share of Apple stock at $165.24 (strike price).

Breakeven price of a sold call option = strike price + option premium = $165.24 + $165.24 = $330.48.

If the price of Apple stock is less than $165.24 in one year, you will make a profit.

For example, if the price of Apple stock in one year is $200, then the option buyer will not exercise the option as the market price of the stock is lower than the option strike price. You will get to keep the option premium, which is your profit.

Profit = premium paid

Profit = $165.24

1-2]

Buying the option

The option is bought at a price of $0 (option premium). By holding this option, you have the right to purchase one share of Apple stock at $165.24 (strike price).

Breakeven price of a bought call option = strike price + option premium = $0 + $165.24 = $165.24.

If the price of Apple stock is more than $165.24 in one year, you will make a profit.

For example, if the price of Apple stock in one year is $200, then the stock can be bought at $165.24 and sold in the market for $200.

Profit = (sale price of stock - purchase price of stock - premium paid)

Profit = ($200 - $165.24 - $0) = $34.76

Selling the option

A profit cannot be made because the option premium is $0.  The profit to an option seller is the premium received on option sale. As the option premium is $0, there is no strategy which can result in a profit