Explain the concepts of pricing in buying and selling call and put options
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Please help with the concept of this problem, which prices to use when buying and selling calls and puts, how do I adjust the premiums.
See the attached file.
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Solution Summary
The solution presents several paragraphs of good explanation of calls, puts, options, selling, buying, naked, covered, writing, premium and other terms specific to option trading. The solution also presents four examples with amounts to utilize the concepts. It is an excellent source.
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See the attached file.
Suppose a stock is priced at $30 and an eight month call on the stock with an exercise price of $25 is priced at $6.00. Compute the taxable gain for each of the following cases. Assume 100 call contracts.
a) You buy the call. Four months later, the stock is at $28 and the call is at $4.50. You then sell the call.
Please note that you buy the call at $6 and sell it at $4.50 so you make a loss of $1.50 on the transaction. There is no mention of exercising the option or of transacting in stock.
b) You buy the call. Four months later the stock is at $31 and the call is at $6.50. You then sell the call.
You buy the call at $6 and sell it at $6.50 gaining $0.50. There is no mention of exercising the option or of transacting in stock.
c) you buy the call. At expiration the stock is at $32. You exercise the call and sell the stock a month later for $35.00.
If you exercise the call your purchase price is $25 + $6= $31 and your selling price is $35 and so your gain per stock is $4.
d) You buy the stock and write the call. You hold the postiton until expiration whereupon the stock is $28.
You pay $30 for purchasing the stock and then at the end of the period you sell it for $28 making a loss of $28 on each stockl
In addition, you write a call for a premium of $6 and get that premium, so your net gain is $6 - $2 = $4.
Notes:
By selling ...
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