Question

Several rumors concerning Wyslow, Inc. stock have started circulating. These rumors are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month put and a one month call option on this stock with an exercise price of $15. You purchased the call at a quoted price of $.40 and the put at a price of $2.30. What will be your total profit or loss on these option positions if the stock price is $4 on the day the options expire?

Answer 1

Given :

Exercise price for both of the options : $15

Premium paid on Call option = $0.40

Premuim paid in Put option = $2.30

Stock price on the day option expires = $4

Calculation total profit or loss on these option positions :

• Call option:

Call will lapse on the day of expiry as strike price is more than stock price on the day of expiry.

Therefore total outflow (premium paid) = -$0.40

• Put option:

Put will be exercised on the of expiry because it is in the money.

Therefore, profit :

S.No.	Particulars	Amount ($)
a.	Exercise price	15
b.	Stock price on the day of exercise	4
c.	Profit (a-b)	11
d.	Premium Paid (Cash Outflow)	2.30

e.

Net Profit (c-d)

8.7

Total net profit earned by me on both of these options = $8.7-$0.40

=$8.30