Question #2: Option Basics Suppose you are given the following information: Pric
ID: 1094835 • Letter: Q
Question
Question #2: Option Basics
Suppose you are given the following information:
Price of the GAP Inc stock: $62
Strike Price of a 1 year call option: $60
Market Price (premium) of the call option: $6
Strike Price of a 1 year put option: $60
Market Price (premium) of the put option: $2
(a) What is the maximum amount the buyer of the call option can gain?
(b) What is the maximum amount the seller of the call option can lose?
(c) What is the maximum amount the buyer of the put option can lose?
Suppose at the expiration date (after 1 year has elapsed), the price of the stock is at $79
(d) What is the profit(loss) per share from buying the stock?
(e) What is the profit (loss) per share from buying a put option contract?
Explanation / Answer
Basics of Option
Remember Few Concepts always,
As Buyer of call Option paid a premium, The Maximum he can loss is the value of Premium and Maximum he can gain is INFINITE. As the value of Call Option grow with growth in Price.
The Writer of Option maximum can gain the Premium and Maximum loss could be INFINITE.
Now We move towards your Questions
a) INFINITE
b) INFINITE
c) The maximum buyer of put option can lose is Value of Premium Paid i.e. $2
d) Profit/(Loss)= Selling price