Question

CoStar Group stock price is $590 and the premium for September CoStar stock call option with strike price X=$550 is $45.30. You just wrote the call option for C=$45.30.

1) For the option premium, how much are the intrinsic value and time value? (4 points)

  

2) What would be your profit / loss if the stock price of Google is $525 on the expiration date? (3 points)

3) What would be your profit / loss if the stock price of Google is $585 on the expiration date? (3 points)

4) At what stock price on the expiration date will you break-even? (4 points)

Answer 1

X = $550

C = $45.30

1) The spot ($590) is greater than the Strike price ($550)

Intrinsic value = The spot price - strike price

Intrinsic value = 590 - 550 = $40

Time value = C - Intrinsic value

Time value = 45.30 - 40

Time value = $5.30

2) Profit = max(St - X, 0) - call option premium

Profit = max( 525 - 550, 0) - 45.30

Profit = 0 - 45.30

Profit = -$45.30 (or a loss of $45.30)

3) Profit = max(585 - 550, 0) - 45.30

Profit = 35 - 45.30

Profit = -$10.30 (or a loss of $10.30)

4) Breakeven price = Strike price + Option premium

Breakeven price = 530 + 45.30

Breakeven price = $575.30

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