Question

The current stock price of RWJ is $312.32. You have the following quotes on RWJ options:

Expiration	Exercise Price	Calls	Puts
Dec	305	27.40	8.25
Jan	310	18.43	14.15
Feb	315	19.55	20.00
May	320	25.55	30.40

a. Which of the options are in the money?
b. What is the exercise value of a February call option with a strike price of $315?
c. Suppose you buy 10 contracts of the February 315 call option. How much will you pay, ignoring

commissions
d. Suppose you buy 10 contracts of the February 315 call option. If RWJ stock is selling for $310 per

share on the expiration date, what is your profit or loss?
e. Suppose you buy 10 contracts of the February 315 call option. If RWJ stock is selling for $320 per

share on the expiration date, what is your profit of loss?
f. Suppose you buy 10 contracts of the May 320 put option. What is the maximum profit you could

achieve?

Answer 1

a. The call options expiring on Dec and Jan are in the money options. The put options expiring on Feb and May are in the money.

b. The exercise value of the call option with a strike price :

= $315 - $312.32

= $2.68

c. I will have to pay: 10 * $19.55

= $195.5

d. Since, the stock price is below the strike price is $315, i paid $195.5 to buy option and the option did not exercise as the stock price is $310. So, i have lost the amount of premium paid which is $195.5.

e. The premium paid for the option is $195.5. The stock is selling for $320 now, so the profit made is = ($320 - $315 = $5 *1 0 contracts = $50 made )

= $195.5 - $50

= $145.5

f. The maximum profit that can be made is :

Suppose the stock price falls to 0,so the profit made is $320 * 10 = $3200

The premium paid will be $304.

So, the maximum profit made is $2,896.