Consider the following option portfolio: You write a January 2012 expiration cal
ID: 2793485 • 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 profitloss on this position if IBM is selling at $157 on the option expiration date? S b. What will be the profitloss 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: S 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.Explanation / Answer
(a)
Income from call premium = 8.93
Income from put premium = 10.85
Market Price = 157, Strike price of Call = 168 & Strike price of Put = 163
As Market Price<Strike Price, so Call option won't get executed.
As Market Price<Strike Price, so Put option will get executed. Loss on Put option = 163 - 157 = 6
So. net profit = 8.93 + 10.85 - 6 = 13.78
(b)
Income from call premium = 8.93
Income from put premium = 10.85
Market Price = 172, Strike price of Call = 168 & Strike price of Put = 163
As Market Price>Strike Price, so Call option will get executed. Loss on Call option = 172 - 168 = 4
As Market Price>Strike Price, so Put option won't get executed.
So. net profit = 8.93 + 10.85 - 4 = 15.78
(c)
For break-even, total option premium should be equal to the loss made for the option.
Total option premium = 8.93 + 10.85 = 19.78
So, for put option, break-even price would be = 163 - 19.78 = 143.22
for call option, break-even price would be = 168 + 19.78 = 187.78
(d)
Betting that IBM stock will go up.