Under what circumstances will the holder of the January 110 call make a gain?

The following quotes were observed for options on a given stock on November 1 of a given year:

Calls Puts

Strike

Nov

Dec

Jan

Nov

Dec

Jan

105

8.40

10

11.50

5.30

1.30

2.00

110

4.40

7.10

8.30

0.90

2.50

3.80

115

1.50

3.90

5.30

2.80

4.80

4.80

a. Under what circumstances will the holder of the January 110 call make a gain?

b. Under what circumstances will the holder of the November 115 put make a gain?

c. Under what circumstances will the holder of the December 105 call make a gain of $200?

d. Under what circumstances will the December 105 call be exercised?

e. Under what circumstances will the holder of the November 110 put be obligated to exercise his

option?

Problem 2

The following prices are available for call and put options on a stock priced at $50. The Black-Scholes model

was used to obtain the prices.

Calls Puts

Strike March June March June

45 6.84 8.41 1.18 2.09

50 3.82 5.58 3.08 4.13

55 1.89 3.54 6.08 6.93

Assume that each transaction consists of one contract (100 options) unless otherwise indicated.

1. What is the intrinsic value of the June 55 put?

2. What is the intrinsic value of the March 55 call?

3. What is the time value of the June 50 put?

4. What is the time value of the March 45 call?

5. Consider a bull money spread using the March 45/50 calls.

a. How much will the spread cost?

b. What is the maximum profit on the spread?

c. What is the maximum loss on the spread?

d. What is the profit if the stock price at expiration is $47?

6. Consider a long straddle constructed using the June 50 options.

a. What will the straddle cost?

b. What are the two breakeven stock prices at expiration?

c. What is the profit if the stock price at expiration is at $64.75?

d. Suppose a put is added to the straddle. This overall transaction is called a strip. Determine the

profit at expiration on the strip if the stock price at expiration is $36.

Problem 3

Consider a stock priced at $30. There are put and call options available at exercise prices of 30 and a time to

expiration of six months. The calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the

stock and the options are European. Assume that all transactions consist of 100 shares or one contract (100

options).

1. Suppose the investor bought a call, and hold it to expiration.

a. What is the investor’s profit, if the stock price at expiration is $37?

b. What is the breakeven stock price at expiration?

c. What is the maximum profit on the transaction?

d. What is the maximum profit that the writer of a call can make?

2. Suppose the investor constructed a covered call.

a. At expiration the stock price is $27. What is the investor’s profit?

b. At expiration the stock price is $41. What is the investor’s profit?

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