1. Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.
2. The common stock of ABC Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to stay in that range in the next three months. You do not know whether it will go up or down, however. The current price of the stock is $100 per share, and the price of a three-month call option on ABC stock with an exercise price of $100 is $10. The price of the three-month put option on ABC stock with an exercise price of $100 is $8.00.
A. What would be the profit/loss, if ABC stock falls to $95?
B. What would be the break-even points of your strategies?

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jepessoa jepessoa · Answer 1 · 2020-09-09T03:01:30+02:00

Answer:

1) ($450) loss

your loss per share = stock's price at expiration date - call strike price - call price = $79 - $75 - $8.50 = -$4.50

since each contract involves 100 stocks, your total loss = -$4.50 x 100 = -$450

2) A. What would be the profit/loss, if ABC stock falls to $95?

the call option will result in a loss = $10 x 100 = $1,000 since you are not going to buy the stock if the price is below the strike price.

the put option will result in a loss = [($100 - $95) - $8] x 100 = $300

your total loss = $1,300

B. What would be the break-even points of your strategies?

you would break even if the price was either $118 or $82.

price 118

call option ⇒ profit = (118 - 100) - 10 = 8

put option ⇒ loss = (8)

price 82

call option ⇒ loss = (10)

put option ⇒ profit = (100 - 82) - 8 = 10