Question

You just bought five July 2020 call option contracts selling at $2.50 on Coca Cola stock (KO).  The option has a strike price of $45.00 and the stock is selling at $46.50 per share.   You are very interested in making money, but you do not wish to purchase any shares of Coke common stock.

1. How much of the $2.50 option price is exercise value and how much is premium?

Exercise Value                            ______

Time Value Premium                  ______

2. How much did you pay for your investment in the five option contracts and how many shares of Coke stock do you control (# of KO shares of stock purchased if the option is exercised)?

Total net $ invested in five option contracts                           _______

# of KO shares of stock that you control                                _______

                                    

3. Assume that it is the last trading day in July before the option is set to expire.  The stock price is at $55.  Assume the option is selling for its exercise value.  What is the option price now and how much have you earned on your investment (total $)?  What action should you take?

Option price        _______

Total $ earned     _______

Your action (circle one):             Purchase shares       Sell Option     Walk Away

4. Now assume that it is the last trading day in July before the option is set to expire, and the stock price is at $35.  Assume the option is selling for its exercise value.   What is the option price now and how much have you earned on your investment (total $)?  What action should you take?

Option price        _______

Total $ earned     _______

Your action (circle one):             Purchase shares       Sell Option     Walk Away

Answer 1

a)

Exercise Value = Current Stock Price-Strike Price = 46.5-45 = $1.5

Time Value = Premium-Exercise Value = 2.5-1.5 = $1

b)

Taking a lot size of 100,

5 contracts means control of 5*100 = 500 shares

Total Cost = 500*Premium = 500*2.5 = $1250

c)

Option Price = Stock Price-Strike Price = 55-45 = $10

Total Profit = Selling Price-Purchase Price = (10-2.5)*500 = $3750

As Not Interested in Purchasing Shares but want to make money, Sell Option

d)

Option Price = Stock Price-Strike Price, but not less than 0 = 45-55 or 0 = 0

Total Profit/(Loss) = -Premium Paid = -2.5*500 = -$1250

As Not Interested in Purchasing Shares but want to make money, Walk Away