Please show work,. Thanks Consider the following options that are written on Ama
ID: 2793076 • Letter: P
Question
Please show work,. Thanks
Consider the following options that are written on Amazon's stock with current price of S290. Assume call and put writers already have their positions covered. Type ion premium per share Call Put Call $280 $290 $300 $12.00 S8.50 $4.30 a) How much is required (or received) UP FRONT if you sell (write) 200 shares of calls with S280 exercise price, buy 100 shares of puts with S290 exercise price, and buy 100 shares of calls with $300 exercise price? (6 points) b) What would be your net profit or loss for your portfolio in (a) if the stock price is $284 at maturity date? (6 points)Explanation / Answer
a)
Option premuim for 1 share of call with $280 exercise price = 12.0
Selling 200 share of call will help me RECEIVE = 200*12 = 2400
Option premuim for 1 share of put with $290 exercise price = 8.5
Buying 100 share of put will make me PAY = 100*8.5 = 850
Option premuim for 1 share of call with $300 exercise price = 4.3
Buying 100 share of call will make me PAY = 100*4.3 = 430
Net amount that I RECEIVE = 2400 - 850 - 430 = 1120
b)
Call option with exercise of 280
Since we sold this option, the buyer has the right to receive the share from us at $280 during maturity. Since my position is covered, it means that I already have the shares bought at $280 apiece. As the share price during exercise date is 284, the buyer will veto his rights and demand shares at $280. This means that the shares that i bought for $290 will be given to the buyer at $280. Thus loss per share for me = $10
Total loss for 200 shares = 200*10 = 2000
Since i received an option premium of 2400 upfront
Net profit for me is the premium that i received upfront = 2400 - 2000 = 400
Call option with exercise of 300
Since I bought this call option with exercise price of 300 and the current share price is 284, I will not exercise my rights (as in that case I will be buying a $284 share at $300). Thus the option premium that i paid earlier is wasted and the net loss for me = 430
Put option with exercise of 290
Since i bought this put option with exercise price of 290, this means that I have the right to sell the share at a price of 290 to the buyer of the option. As the current price is 284, this is beneficial to me as I can buy the share from market at 284 and sell it at 290. This gives me a net profit of $6 per share.
Total profit for 100 shares = 100*6 = 600
Since i paid an upfront premium of 850, my net loss is = 600-850 = 250
Thus the Net Loss for entire portfolio = 400 - 430 - 250 = -$280