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Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price $168, and the price of the call option is $8.93. You also write a January expiration IBM put option with exercise price $163, the price of the put option is $10.85.

Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent.

a. What will be the profit/loss on this position if IBM is selling at $157 on the option expiration date? $

b. What will be the profit/loss on this position if IBM is selling at $172 on the option expiration date? $

c. At what two stock prices will you just break even on your investment (i.e., zero net profit)?

For the put, this requires that: $

For the call this requires that: $

d. What kind of “bet” is this investor making; that is, what must this investor believe about IBM’s stock price in order to justify the position?

betting that the IBM stock price will go up.
betting that the IBM stock price will go down.
betting that the IBM stock price will have low volatility.
betting that the IBM stock price will have high volatility.

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Tod Thiel
Tod ThielLv2
29 Sep 2019
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Related questions

a. You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

b. The potential loss for a writer of a naked call option on a stock is _________.

A) equal to the call premium
B) larger the lower the stock price C) limited
D) unlimited

c. You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

1. A put option on Snapple Beverage has an exercise price of $30. The current stock price of Snapple Beverage is $24.25. The put option price is $7.75

a. Is this option an at-the-money option, out-of-the-money option, or in-the-money option?

b. Compute the intrinsic value and the time value of this option.

2. You write a put option with X = $50 and buy a put with X = $60. One is selling for $3 and another is selling for $8. The options are on the same stock and have the same maturity date.

a. What is the break-even point for this strategy?

b. How much is profit/loss when stock price is $55?

3. George Evans is currently bullish on the common stock of the Franklin Corporation. Franklin’s current price is $75 and a 3-month call with an exercise price of $75 is selling for $4. Ignore commissions and taxes. If Evans purchases the call and the price of the stock increases to $81 after 3 months, what kind of rate of return will he make?

4. You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date when IBM stock sells for $113 per share. What will be your realized profit/loss on the investment?

Use Chart for 1-6
Stock Strike Price Market Price Strike Price Market Price
Prices ofCall ofcall ofput of put
Ford $8.50 $7.50 $1.90 $7.50 $1.00

IBM $95.50 $90.00 $9.50 $90.00 $1.00

Kroger $28.25 $30.00 $1.10 $30.00 $2.55

1) If you buy 100 shares of ford at the price given and 1 callcontract (1 contract=100 shares), your out of pocket costs for bothpositions is:
(this can also be called going long the stock and long the calloption).

2) If you buy 100 shares of IBM at the price given and 1 callcontract (1 contract =100 shares), your out of pocket costs forboth positions is:

3) If you buy 100 shares of IBM at the price given and sell 1 callcontract (1 contract= 100 shares), your out of pocket costs forboth positions is:

4)If you buy 100 shares of IBM at the price given and BUY 1 Putcontract ( 1 contract=100 shares), your out of pocket costs forboth positions is:

5)If you buy 1 Call contract on Ford at the price given and BUY 1Put contract (1 contact=100 shares), your out of pocket costs forboth positions is:

6) If you sold 1 Call contract on IBM at the price given and sold 1Put contract (1 contract = 100 shares), your out of pocket costsfor both positions is:
(This can also be called "going short the call and short the putoption).

7) You buy one Ford Call at today's price. At the call'sexpiration, the stock is trading at $10 per share. What is yourtotal profit (1 contract is based on 100 shares)?

8) You buy 1 put on Kroger; at expiration, Kroger is trading at $31per share. What is the profit/loss of this option position?

9) Assume you can either buy IBM stock or one call on IBM at theprices quoted. Assume that at the option's expiration (actual datenot given, but sometime in the future), IBM is trading at $105 pershare. The holding period return is the ending value less beginningvalue divided by the beginning value. What is the % return fromholding each position from today until the option expires?

10)For the Call on Ford stock, what is the exercise value (pershare)?

11)For the call on IBM, what is the premium paid for the option (atthis moment in time)?

12)For the call on Kroger, if it is purchased at the market price,how much of a price increase in the stock is needed to breakeven onthe trade?

13)For the put on Ford, what is the premium paid for the option (atthis moment in time)?

14)For the put on IBM, what is the break-even if you are long thestock and purchased the put at today's value?
(Long the stock means you own the stock (at today's price) and yourpurchas at put at today's price).

15) For the put on Kroger, that is the premium paid for the putoption (at this moment in time)?

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