Question

9. The current barrel of oil price is equal to 47.23 USD/barrel. We expect that the price will decrease to 46.89 USD/barrel. The bank offers call and put option with strike price equal to 47.07 USD/barrel. The option premium is equal to 0.12 USD/barrel. The one option contract contains 100 barrels. Investor has 6 000 USD. How many and what options will you purchase? What will be result of the operation if your expectations will prove to be true?

Answer 1

1)	As the expected future price per barrel of $46.89 is less
	than the strike price-option premium (per barrel) of
	$47.07-$0.12 = $46.95, it would be profitable to buy
	put options.
	On the expiry date the oil can be purchased from the
	open market at $46.89 per barrel and then can be sold
	against the put optio at $47.07 per barrel.
	The gain per barrel = 47.07-0.12-46.89 = $0.06 per barrel.
2)	Number of put option contracts that can be purchased = 6000/(0.12*100) =	500	put options
	(500 contracts is equal to = 500*100 = 50000 barrels)
3)	Purchase cost of 50000 barrels from the open market = 46.89*50000 =	$ 23,44,500
	Option premium paid = 50000*0.12 =	$           6,000
	Receipts for sale under put option = 50000*47.07 =	$ 23,53,500
	Profit from the operation = 2353500-2344500-6000 =	$           3,000
	[Alternatively 50000*0.06 = $3000]