Question

You sold fifty put contracts (1 contract = 100 shares) on ABC stock at an option premium of $0.80. The options have an exercise price of $30. The options were exercised today when the stock price was $28.75 a share. What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $28.75? Ignore transaction costs and taxes

As you were not sure if the price of ABC stock would rise or fall in price, you also bought a certain number of call option contracts (1 contract = 100 shares) at a premium of $0.65 and the same exercise price. How many contracts would you have had to buy to ensure that you break-even? (Round up number of contracts to a whole number)

Answer #1

Payoff from Put option = Max [ (Exercise price * stock price ) ,0 ]

Profit = Payoff - option premium

The stock price is less than the exercise price hence the put is in money .

Profit = ( 30 - 28.75 ) * 50*100 - 0.8*100*50 =-2250

There is a loss of $2250

Total option premium recieved on put option = 0.8 *50*100 =4000

To breakeven we have to buy call option and pay premium equal to amount recieved in put option

= 4000 / 0.65 = 6153.85

No of contracts = 6153.85 / 100 = 61.53 contracts

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Ignore transaction costs and taxes.

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