Question

An option is written over 1,000 Pacific Limited shares. The option gives the right to sell 1,000 Pacific shares at a price of $19.00 per share, on or before, 30th November. It is now the 18th of November. Currently a Pacific share can be traded on the stockmarket at a price of $20.40. The option contract can be sold on the market for $0.75. (i) Is this a call or a put option? (ii) What is the option’s exercise price? (iii) What is the option’s current premium? (iv) Would you exercise the option now? Why? (v) If on the day of expiry, Pacific Limited shares were trading for $18.60, what is the option pay-off for the holder of the option?

Answer 1

(i) This is a put option since it is giving you the right to sell.

(ii) Strike price = $19.00

(iii) option's current premium = $0.75

(iv) No, I would not exercise the option now since the exercise price is less than the stockmarket price and hence, it would not be beneficial to exercise the option right now.

(v) Option payoff (at ST = $18.60) = 1000*($19 - $18.60) = $400

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