Question

An investor buys a put option on a share for $4.The stock price is $45 and the strike price if $40.Explain under what circumstances the investor makes a profit and under what circumstances will the option be exercised. Sketch a diagram showing the variation of the investor's profit with the stock price at the maturity of the option. (Please explain the answer in detail, thank you)

Answer #1

When the stock price on the expiration date is less than $37
then the investor will make a profit. In this scenario the gain by
exercising the option is greater than $4. The option must be
exercised if the stock price is less than $40 at the time of
maturity of the option. For further analyzing the investor’s profit
refer the schedule and the diagram mentioned here below:

Stock Price | Put Option Value | Profit |
---|---|---|

0 | 40 | 36 |

10 | 30 | 26 |

20 | 20 | 16 |

30 | 10 | 6 |

40 | 0 | -4 |

50 | 0 | -4 |

60 | 0 | -4 |

70 | 0 | -4 |

An investor buys a European call on a share for $3. The stock
price is $40 and the strike price is $42.
a. Under what circumstances does the investor make a profit?
b. Under what circumstances will the option be exercised?
c. What is the potential loss for the investor?
d. Identify the variation of the investor's loss with the stock
price at the maturity of the option?

1. A trader buys a call option with a strike price of €45 and a
put option with a strike price of €40. Both options have the same
maturity. The call costs €3 and the put costs €4. Draw a diagram
showing the variation of the trader’s profit with the asset price.
Explain the purpose of this strategy

A trader sells a European call option on a share for 4 SEK. The
stock price is 47 SEK and the strike price is 50 SEK. Under what
circumstances does the trader make a profit? Under what
circumstances will the option be exercised? Draw a diagram showing
the variation of the trader’s profit with the stock price at the
maturity of the option.
Please carefully label: Breakeven point, profit, loss and don't
forget the diagram.. thanks in advance!

An investor sells a European call on a share for $4. The stock
price is $47 and the strike price is $50. Under what circumstances
does the investor make a profit? Under what circumstances will the
option be exercised? Explain how investors profit, according to the
variation of the stock price at the maturity of the option. (You
can explain by writing a simple formula of the profit, where X is
the stock price at maturity.

Suppose that a June put option on a stock with a strike price of
$60 costs $4 and is held until June. Under what circumstances will
the holder of the option make a gain? Under what circumstances will
the option be exercised? Draw a diagram showing how the profit on a
short position in the option depends on the stock price at the
maturity of the option.
**Can you please explain step by step on how to do this
question***...

A small finance company buys a European put option on Facebook
stock. The option price is $20 with a strike price of $250. The
option will expire in three months while the current spot price of
Facebook stock is $226.
a. Does the finance company have the financial right or
obligation to sell or buy the underlying share on the maturity day
of the option? Please briefly explain your answer.
b. If the spot price of Facebook share is $230...

.
Suppose that a March call option on a stock with a strike price of
$ 50 costs $ 2.50 and is held until March. Under what circumstances
will the holder of the option make a gain? Under what circumstances
will the option be exercised? Draw a diagram showing how the profit
on a long position in the option depends on the stock price at the
maturity of the option.

Suppose that a European put option has a strike price of $150
per share, costs $8 per share, and is held until maturity.
a) Under what circumstances will the seller of the option make a
profit?
b) Under what circumstances will the buyer exercise the
option?
c) Draw a diagram (or a table) illustrating how the profit from
a short position in the option depends on the stock price at the
maturity of the option.

The price of a stock is $40. The price of a one-year European
put option on the stock with a strike price of $30 is quoted as $7
and the price of a one-year European call option on the stock with
a strike price of $50 is quoted as $5. Suppose that an investor
buys 100 shares, shorts 100 call options, and buys 100 put
options.
a) Construct a payoff and profit/loss table
b) Draw a diagram illustrating how the...

The current price of a stock is $40. The price of a one-year
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quoted at $2 and the price of a one-year European call option on
the stock with a strike price of $50 is quoted at $3.
a) Investor A is bullish on the stock and buys 100 shares.
Compute his dollar profit and return if the share price is $25,
$42, or $56 in one...

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