Question

You have taken a long position in a call option on IBM common
stock. The option has an exercise price of $176 and IBM’s stock
currently trades at $180. The option premium is $5 per contract.
(LG 10-4)

How much of the option premium is due to intrinsic value
versus time value?

page 350

What is your net profit on the option if IBM’s stock price
increases to $190 at expiration of the option and you exercise the
option?

What is your net profit if IBM’s stock price decreases to
$170?

Answer #1

Exercise Price of Long Call - $ 180

**Calculation of Option Premium Due to Intrinsic
Value**

Intrinsic Value = (Current Price - Exercise Price)

=$180-$176

= $ 4

Time value of option is i.e. =(Call premium - Intrinsic Value)

= $1 ($5-$4)

Net profit on the option if stock price increases to $190

**If the IBM’s stock price increases to 190 $**

Then i would like to exercise the call option and will buy the share at $176 giving me a Net profit of

= (Share price - Exercise Price) - Call Premium

=(190-176) - 5

= **$ 9**

If the IBM’s stock price is 170 $ then we would not the exercise the call option and will buy it from market at 170$ and the call option will lapse

There will be **No Net profit if IBM’s stock price is
170$**

However the call premium of 5$ would have been already paid so
the **cost will be 5$**

Consider the following options portfolio. You write an August
expiration call option on IBM
with exercise price $150. You write an August IBM put option with
exercise price $145.
a. Graph the payoff of this portfolio at option expiration as a
function of IBM’s stock price at
that time.
b. What will be the profit/loss on this position if IBM is selling
at $153 on the option expiration
date? What if IBM is selling at $160? Use the data in...

2. Suppose you purchase a put option to sell IBM common stock at
$100 per share in September. The current price of IBM is $85 and
the option premium is $10.
a. What is the intrinsic value of this option? As the expiration
date on the option approaches, what will happen to the size of the
option premium?
b. What would be in intrinsic value if this was a call
option?

Suppose you construct the following European option trades on
Microsoft stock:
purchase a call option with an exercise price of $28 and a premium
of $12 and
write a call option with an exercise price of $62 and a premium of
$6. What is your maximum dollar net profit, per share?

The price of a stock is $61 and a call option with a strike
price of $60 sells for $5 (i.e.,
the option premium is $5.). *SHOW WORK*
(a) What is the option’s intrinsic value?
(b) What is the option’s time premium?
(c) You purchased the call for $5. If, at the expiration of the
call, the price
of the stock is $66, what is the profit (or loss) from buying
the call?
(d) You purchased the call for $5....

a. As the stock’s price decreases, a call
option on the stock ___________ in value.
b. As the stock’s price decreases, a put
option on the stock ___________ in value.
c. Given two put options on the same
stock with the same time to expiration, the put with the lesser
strike price will cost ________ than the put option with the lower
strike price.
d. Given two call options on the same stock
with the same time to expiration, the...

CoStar Group stock price is $590 and the premium for September
CoStar stock call option with strike price X=$550
is $45.30. You just wrote the call option
for C=$45.30.
1) For the option premium, how much are the intrinsic value and
time value? (4 points)
2) What would be your profit / loss if the stock price of Google
is $525 on the expiration date? (3 points)
3) What would be your profit / loss if the stock price...

Suppose that you have taken a short position on a call option.
The strike price if $55, and the option premium / price is $5. When
the option expires, the value of the underlying asset is $54. What
is your pay-off and profit / loss?
*** You must show your work to get credit (you can use
both sides of the page to show your work)

•IBM stock price = $100
•Price of IBM call (exercise price = $100) and expiring
in two months = $2/share
• Alternative Investments
• A. Buy 100 shares of IBM: 100 x $100 =
$10,000
• B. Buy 1 IBM call contract: 100 x $2 = $
200
Suppose IBM stock rises to $120/share by expiration day
for the call.
what is the return on the shares, and what is the return
on the call?

You currently own one share in IBM. The current share
price (stock price) is 50. You begin to notice mixed signals about
IBM’s future and you fear that stock prices might fall. You want to
hedge against this possibility while being able to profit from
further share price increases. Call options for 1 share in IBM and
a strike price of 50 are trading on the exchange for a premium of
5. Put options for 1 share in IBM and...

Suppose you construct the following European option trades on
Apple stock: write a put option with exercise price $33 and premium
$1.57, and write a call option with exercise price $33 and premium
$4.29. What is your maximum dollar net profit, per share?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 6 minutes ago

asked 8 minutes ago

asked 45 minutes ago

asked 47 minutes ago

asked 49 minutes ago

asked 54 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago