Question

Today’s share price of Netflix is $270. You think Netflix's stock will rise over the next 3 months.

Today you observe the following option prices (all expiring in 3 months):

Option 1: Call Option Premium = $9.   a Strike Price = $275

Option 2: Call Option Premium = $7.    a Strike Price = $280

1. Which of these options is in-the-money today?

A) Both
B) Neither
C) Only Option 1

D) Only Option 2

2. Today you buy Option 1 and sell Option 2; (bull call spread). At expiration the stock price equals $279. What is your profit or loss (on a per share basis)?
A) A loss of $5
B) A loss of $3

C) A profit of $2

D) A profit of $3

E) A profit of $5

3. Suppose you purchase Option 1 and also purchase Option 2. What is your breakeven stock price (on a per share basis) at expiration?
A) $284
B) $285.50

C) $287.50

D) $291
E) $296

Answer 1

1

Answer is neither.

Put option is in the money when exercise price is higher than spot price. Call option is out of money when strike price is more than spot price.

2

Net option premium received 4 less 2 is equal to 2.

Option one is exercised but option two is not exercised.

Profit on option 1 equal to 279 - 275 equal to 4.

Net profit is equal to 4 minus 2 is equal to 2.

Answer is net profit of 2.

3

Break even stock price is the price at which there is no profit or loss.

Tote option premium paid 9 + 7 equal to 16.

At stock price of 285.5 profit on option one is 285.5 less 275 equal to 10.5.

Stock price to 285.5 profit on option to is 285.5 less 280 equal to 5.5.

Total profit is 10.5 + 5.5 equal to 16. This is break even stock price as total profit is equal to total option premium paid

Answer is 285.5

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