# Options

1) A particular call is the option to buy stock at $25. It expires 6 months and currently sells for $4 when the price of the stock is $26.

a) What is the intrinsic value of the call? What is the time premium paid for the call?

b) What will the value of this call be after 6 months if the price of the stock is $20? $30? And $40?

c) IF the price of the stock rises to $40 at the expiration date of the call, what is the percentage increase in the value of the call? Does this example illustrate favorable leverage?

d) If an individual buys the stock and sells this call, what is the cash out-flow (i.e., net cost) and what will the profit on the position is after six months if the price of the stock is $10? $15? $20? $25? $26? $30? $40?

e) If an individual sells this call naked, what will the profit or loss be on the position after 6 months if the price of the stock is $20? $26? $40?

2) The price of a stock is $51. You can buy six months call at %50 for $5 or a 6-month put at $50 for $2.

a) What is the intrinsic value of the call?

b) What is the intrinsic value of the put?

c) What is the time premium paid for the call?

d) What is the premium paid for the pull?

e) IF the price of the stock falls, what happened to the value of the put?

f) What is the maximum you could lose by selling the call covered?

g) What is the maximum possible profit if you sell the stock short?

h) After six months, the price of the stock is $58

i) What is the value of the call?

j) What is the profit or loss from buying the put?

k) If you had sold the stock short six months earlier, what would your profit or loss be?

l) If you sold the call covered, what would your profit or loss be?

3) A stock that is currently selling for $47 has the following 6-month options outstanding:

Strike Price Market Price

Call Options $45 $4

Call Options 50 1

a) Which option(s) is (are) in the money?

b) What is the premium paid for each option?

c) What is the profit (loss) at expiration given different prices of the stock- $30, $35, $40, $45, $50, $55, and $60-if the investor buys the call with the $45 strike price?

d) What is the profit (loss) at expiration given different prices of the stock-$30, $35, $40, $45, $50, and $60-if the investor buys the call with the $50 strike price. Compare your answers (c) and (d).

e) What is the range of stock prices that will generate a profit if the investor buys the stock and sells the call with the $50 strike price?

f) What is the range of stock prices that will generate a profit if the investor buys the stock and sells the call with $45 strike price? Compare your answers to (e) and (f).

#### Solution Summary

Answers to questions on options