Question

11) An investor purchases an ABC 60 call for $1.50 in January with March expiration. Following a stock price increase in February, ABC 60 calls are trading for $7.50, ABC 70 calls are trading for $2.00, and ABC 70 puts are trading for $2.00. All option contracts cover 100 shares and have March expiration. As a follow-up strategy in February, the investor sells an ABC 60 call for $7.50 and purchases three ABC 70 calls at $2.00/each. What is the profit or loss from the overall strategy if the stock price is $75 at expiration?

Question 11 help Thanks

Answer 1

We know that, size of contract of calls = 100 share

Therefore cost of ABC 60 call purchase in January = 100 * $1.50 = $150

Selling price of ABC 60 call in February = 100 * $7.50 = $750

Cost of ABC 70 calls purchase in February (3 calls) = 3*100 * $2.00 = $600

Payoff from ABC 70 calls in March (3 calls) = 3*100 * (share price – strike price) = 3 * 100 *($75 - $70) = $1,500

Therefore profit/loss from overall strategy = Selling price of ABC 60 call in February + Payoff from ABC 70 calls in March (3 calls) - cost of ABC 60 call purchase in January + Cost of ABC 70 calls purchase in February (3 calls)

= $750 +$1,500 -$150 - $600

= + $1,500

Therefore profit from overall strategy is $1,500