Today is Aug 15 and IBM stock is trading at $50. David formulates a trading strategy using IBM stock options that expire in October. He writes two options on IBM stock: one is OCT 60 call option priced at $2.00, the other is OCT 40 put option priced at $1.50. He buys two options on IBM stock: one is OCT 50 put option priced at $2.80, the other is OCT 50 call option priced at $3.50. Your task is to explain David's net position: At what stock prices he will make profits and at what stock prices he will incur losses? What is the maximum profit for his strategy? At what stock prices he will maximize profits?

Today is Aug 15 and IBM stock is trading at $50. David formulates a trading strategy using IBM stock options that expire in October. He writes two options on IBM stock: one is OCT 60 call option priced at $2.00, the other is OCT 40 put option priced at $1.50. He buys two options on IBM stock: one is OCT 50 put option priced at $2.80, the other is OCT 50 call option priced at $3.50. Your task is to explain David's net position: At what stock prices he will make profits and at what stock prices he will incur losses? What is the maximum profit for his strategy? At what stock prices he will maximize profits?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are an option trader in an investment company. Through your research on the company PEAR, you believe that PEAR's stock price, which is currently trading at $50, will remain in a range between $45 and $55 over the next month. Which option trading strategy best suits your investment view? (All options expire in 30 days). Select one: O A. Buy a call with strike price $55 and write a put with strike price $45 OB. Write a call with strike price $55 and buy a put with strike price $45 O C. Write a call with strike price $55 and write a put with strike price $45 O D. Write a call with strike price $55 and short a share of the stock O E. Buy a call with strike price $55 and buy a put with strike price $45
Assume you own a call option on IBM stock with a strike price of $40. The option will expire in exactly six months time. If the stock is trading at $35 in six months, what will be the payoff of the call? Options for above is { $0.00 , $10,00 , $15.00 , $75.00 , $95.00 } Assume that you have shorted the call option described above, if the stock is trading at $55 in six months, what will you owe?Options for above is { $0.00 , $10.00 , $15.00 , $75.00 , $95.00 }If the stock is trading at $50 in six months, what will be the payoff of the call?Options for above is { $0.00 , $10.00 , $15.00 , $75.00 , $95.00 }
IBM stock is currently trading at $100 per share. An investor purchases one Put option contra on IBM with a $100 strike and at a price of $3.00 per contract. Each options contract represer an interest in 100 underlying shares of stock. For each of the following scenarios determine i 7. the option is in the money, at the money, or out of the money. Show your work. A. When the option expires, IBM is trading at $98 B. When the option expires, IBM is trading at $90 C. When the option expires, IBM is trading at $97
An investor owns Citibank stock at $75. They want to sell some 3-month out- of-the-money call options against their position. STRIKES 72.50 75 77.50 CALL PRICE 5.60 4.12 2.84 Create a table showing the profit and loss for underlying trading at 70, 72.5, 75, 77.5, 80 and 82.5 for all the positions and the option strategy. Draw an expiry pay-off diagram, using the prices in the table.
You have the following information about LearnMore Inc.’s stock and a two-month call option with a strike price of $140.00. LearnMore Inc.’s current stock price is $100.00. You are using the multiperiod binomial option pricing model to find the value of the two-month option with two periods. ∏u∏u and ∏d∏d values given here apply to any period. Data Collected for LearnMore Inc. u 1.5032 d 0.5922 ∏u∏u 0.2357 ∏d∏d 0.3555 You work with a junior analyst to calculate the value of the option, and she submits her inferences to you. Which of the following points are true in the case of LearnMore Inc.’s stock options? Check all that apply. The option payoff if the stock goes up in two months will be $10.32. The value of the two-month call option with a strike price of $140.00 at the end of two months will be $2.43. The value of the call option will always remain $2.43, irrespective of the time until expiration. LearnMore Inc.’s stock price…
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. If the stock is trading at $55 in three months, what will be the payoff of the call? Note: practice drawing the payoff diagram. Assume that you have shorted the call option in Question 2. If the stock is trading at $55 in three months, what will you owe? Note: practice drawing the payoff diagram. (ONLY ANSWER THIS QUESTION)
You wish to build a synthetic long call for Microsoft stock with a strike price of $40.00 and an expiration of March. Microsoft stock currently sells for $40. The March 40 call for MSFT has a premium of $1.25, while the March 40 put for MSFT has a premium of $3.75. What will be the value of your position if at expiration Microsoft stock is selling for $45.00? Assume one contract on the option. Enter loss as a negative number.
Consider a particular stock with call and put options. The date is January 12, and the price of the stock is P185. The table below shows the closing prices of four options, two of which expire in February and May and have exercise prices of 175 and 205, respectively. The February options will expire on February 16th, while the May options will expire on October 20th. These specific selections are of the American style. Exercise Price February Calls May Calls February Puts May Puts 175 25.00 33.50 18.00 26.75 205 18.20 20.22 25.25 32.18 Consider the February call. Explain (with supporting calculations) that the option holder has no reason the option right now. When is the purchased justified? Explain (with supporting calculations) that, given February call at an exercise price is less likely also to be exercised. Suppose that the option buyer has an alternative to purchase May call instead of February call. Explain why May options are more…
Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? What will be the profit in each scenario to an investor who buys the put for $6?a. $40b. $45c. $50d. $55e. $60
2. Consider a particular stock with call and put options. The date is January 12, and the price of the stock is P185. The table below shows the closing prices of four options, two of which expire in February and May and have exercise prices of 175 and 205, respectively. The February options will expire on February 16th, while the May options will expire on October 20th. These specific selections are of the American style. Exercise Price February Calls May Calls February Puts 18.00 May Puts 175 25.00 33.50 26.75 205 18.20 20.22 25.25 32.18 A. Consider the February call. Explain (with supporting calculations) that the option holder has no reason the option right now. When is the purchased justified? B. Explain (with supporting calculations) that, given February call at an exercise price is less likely also to be exercised. C. Suppose that the option buyer has an alternative to purchase May| call instead of February call. Explain why May options are more likely to be exercised than…
Turn back to Figure 20.1 , which lists prices of various IBM options. Use the data in the figure tocalculate the payoff and the profits for investments in each of the following January expirationoptions, assuming that the stock price on the expiration date is $125.a. Call option, X 5 $120.b. Put option, X 5 $120.c. Call option, X 5 $125.d. Put option, X 5 $125.e. Call option, X 5 $130.f. Put option, X 5 $130.
The table below describes 4 newly issued options and lists their prices in the right-most column. All of the options expire in 1 year. The underlying asset for the options is Stock X. Type of option Barrier Strike Price Knock-in call 55 50 9.72 Knock-in call 80 50 8.92 Knock-out call 80 50 4.10 Knock-in put 55 50 2.18 Determine the price of a newly issued 1-year knock-out call on Stock X with a barrier of $5 and a strike of $50. O A) 1.12 O B) 3.30 O C) 7.54 O D) 10.84 E) 14.54

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