Consider the following quotes for WalMart options. Assume these are European Opt
ID: 2616422 • Letter: C
Question
Consider the following quotes for WalMart options. Assume these are European Options. CALL OPTIONS: EXPIRE AT CLOSE May 23, 2011 Bid 19.9 14.2 Strike Svmbol Vol Open Int 2,88 8,488 151,844 19,673 63,305 37,550 61,326 19,503 48,826 14,155 39,859 6,016 Last WWTAF.X 119.4 WWTAG.X14.8 WWTAH.X10.18 WWTAV.X8 WWTAI.X5.89 WWTAW.X4.19 WWTAJ.X2.85 WWTAX.X1.71 WWTAK.X.91 WWTAY.X.55 WWTAJ.X.2 WWTAN.X.05 14.4 42.5 47.5 50 52.5 28 134 62 1.65 4 N/A 09 95 57.5 60 .05 .25 PUT OPTIONS: EXPIRE AT CLOSE May 23, 2011 Strike Symb Bid 05 Vol 100 Last WWTMF.X.1 WWTMG.X.25 WWTMH.X.55 WWTMV.X.9 WWTMLX 11.45 WWTMW.X 2.25 WWTMJ.X3.3 WWTMX.X4.5 WWTMK.X6.5 WWTMY.X7.8 WWTMJ.X13.8 WWTMN.X24.3 Open Int 7,261 14,834 63,300 46,933 72,640 25,065 47,587 10,426 3,418 220 35 05 42.5 06 1.45 92 47.5 50 52.5 73 100 57.5 60 70 Suppose on May 23, 2011, each share of Walmart stock is currently selling for $52.68. What would your profit be if today you did the following things? sold 5 contracts of calls #5. (5pts) Bought 2 contracts of puts #8. (5pts) straddled short with one contract each of call #4 and put #4. (5pts) Sold 4 contracts of call #8 and bought 7 contracts of put #2. (5pts) d.Explanation / Answer
For Call the Break Even Point would be Strike Price + Premium. Since Call will be exercised when the market is up.
For Put the Break Even Point would be Strike Price - Premium. Since Put will be exercised when market is down.
Spot Price of Stock is $ 52.68.
Computation of Profit :-
a. Sold 5 contracts of Call #5 (i.e. 5*28 = 140 Stocks).
i. Since we have sold calls at Bid Price we get (5.8*140) = $ 812
ii. The Strike Price is 45 & Market Price is $52.68 hence
the buyer of call exercise call option we have to buy
call at $45 i.e. net off payment (52.68-45)*140 = $(1075.20)
Hence Net loss (i-ii) = $ (263.2)
b. Bought 2 contracts of Put #8
i. Since we have bought put at Ask price we pay
(2*10*4.9) = $(98)
ii. The Strike price of Put is 52.5 and market price is 52.68
we will not exercise the option it got lapse = Nil
Net Loss (i-ii) = $ (98)
c. Straddled short with one contract each of Call #4 and Put #4.
i Since we have short call we will receive (1*7,7*1) = $ 7.7
ii. Since we have short Put we will receive (1*0.9*10) = $ 9
iii. Since market price is $ 52.68 and Call Strike Price is 42.5
the buyer will exercise the option we have to pay net
(52.68-42.5)*1 = $(10.18)
iv. Since the strike price of put is 42.5 and market
price of stock is 52.68 the buyer of put option will
not exercise the option and we gain the premium = Nil
Net Gain (i + ii - iiii- iv) = $ 6.52
d. Sold 4 Contracts of Call # 8 and bought 7 Contracts of Put #2
i. Since we have short call we receive (4*1.65*20) = $ 132
ii. Since we have long put we pay (7*0.3*1) = $ (2.1)
iii. Since strike price of Call is 52.5 and market price
of stock is $ 52.68 the buyer of option will exercise
the option and we have to pay net
(52.68-52.5)*4*20 = ($14.4)
iv. Since we have bought the Put we have right to
sell Stock at strike price of $35 but market price is
$52.68 hence we will not exercise the option = Nil
Net Gain (i - ii - iii - iv) = $ 115.50.