Consider the following option portfolio: You write a January 2012 expiration cal
ID: 2719211 • Letter: C
Question
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 $162 on the option expiration date? $
b. What will be the profit/loss on this position if IBM is selling at $174 on the option expiration date? $
Explanation / Answer
a.call option:exercise price(EP)=168; Selling price (SP)=162; premium = 8.93$
SP,< EP - out of money - lapse of option
loss=premium = 8.93$
put option: EP=163$; SP=162$; premium = 10.85$
SP<EP- in the money- exercise the option
gain=163-162-10.85=(9.85)$-loss
b. call option: EP= 168$, SP=174$
SP>EP- in the money Exercise the option
GAin= 174-168-8.93=-2.93$---loss
put option: EP= 163$ ; SP=174$
SP>EP- out of money-lapse the option
loss= premium= 10.85$