Question

1. You buy a put option with strike price of $25. Currently, the market value of the underlying asset is $30. The put option premium is $3.25. Assume that the contract is for 150 units of the underlying asset. Assume the interest rate is 0%. a. What is the intrinsic value of the put option? b. What is the time value of the put option? c. What is your net cash flow if the market value of the options’ underlying asset is $23 on the expiration date? d. What is your net cash flow if the market value of the options’ underlying asset is $27 on the expiration date? e. Draw a diagram depicting the net payoff (profit diagram) of your position at expiration as a function of the market value of the underlying asset. f. A call option with strike price of $24 on the same underlying asset has a premium of $4.15. Suppose that a trader sells one call option and two of the $24 strike put options. What are the breakeven stock prices above and below which the trader makes a profit? In other words, under what circumstances does the trader make a profit?

Answer 1

Ans a) Intrinsic Value of PUT Option = call strike price -underlying's current price

= 30-25

= 5

Ans b) Time Value of PUT Option = Put premium-Intrinsic Value

= 5-3.25

=1.75

Ans c) Cashflow if price = $23

= 25-23

=$ 2 Profit

Ans d) If Price is 27 then , = 25 - 27

=-2

= $ 2 Loss

Ans e)

Here in this payoff Diagram the Scenrio on the base of Market position and Profit Structure is their.

Ans f) If Trade Writer took position where ,

SELL CE $24 at 4.15 - 1 qty

SELL PE $ 24 - 2 qty

• If stock price would be 24 or greater than 24 the Trader would be making Profit. As the Position is of Bullish Neutral strategy.