Suppose that a trader writes three naked put option contracts, with each contract being on 100shares of underlying stock. The option price is $3 on each share, the time to maturity is sixmonths, and the strike price is $60.a.Write out the formula and draw the graph for the trader's profit on each put option on 1share of stock.b. What is the margin requirement for the trader if the current stock price is $58?C. How would the answer to (b) change if the trader is buying instead of writing the options?

A. Profit Formula and GraphThe dealer's earnings on each positioned choice for 1 share of stock…

Answered: Suppose that a trader writes three…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A stock price is $30. An investor buys one call option contract on the stock with a strike price of $28 and sells a call option contract on the stock with a strike price of $27. The market prices of the options are $2 and $1.7, respectively. The options have the same maturity date. Describe the investor’s position and the possible gain/loss he will get (taking into account the initial investment). Make a graph of your gain/loss.
Suppose that call options on a stock with strike prices $100 and $106 cost $8 and $5, respectively. How can the options be (the profits from option positions and the total profit).
Suppose you construct a strategy based on options on a stock that is currently selling for $100. The strategy is as follows: Buy one call option having an exercise price of $95. Sell two calls having an exercise price of $100. Buy one call option having an exercise price of $105. All of the options are written on the same stock and all have the same expiration date. Compute the payoff (the dollars you receive) from this strategy at the expiration date for each of the following alternative stocks prices: $90, $95, $98, $100, $102, $105, and $110. What additional information would be required to determine whether your strategy had been profitable? What is the name of this strategy?
Suppose you purchase eight call contracts on Macron Technology stock. The strike price is $60 and the premium is $3. If, at expiration, the stock is selling for $64 per share, what are your call options worth? What is your net profit?
Suppose an investor purchases a 3-month call option and a 3-month put option on ABC stock. The strike of the call option is $60; the strike of the put option is $65. Suppose the price of the put option is $4.20, the price of the call option is $3.50. a. Suppose the price of ABC stock at option expiry is $62 per share. What is the payoff and profit/loss on both options positions? b. What is the maximum profit the investor could have earned on his call option position? On the put position? Edit Minit
Suppose that both a call option and a put option have been written on a stock with an exerciseprice of $40. The current stock price is $42, and the call and put premiums are $3 and $0.75,respectively. Calculate the profit to positions of both the short call and the long put with an expiration day stock price of $43.
Suppose you write the following put option (1 option, not 1 contract containing 100 options). What is the payoff and profit at expiration if the stock price is $75? Put Strike Symbol 80 ABC210621C00040000 Last 3.32 a. payoff is -5.00; profit is 1.68 X b. payoff is -5.00; profit is 3.32 c. payoff is 0; profit is 0 d. payoff is -5.00; profit is -1.68 e. payoff is 0; profit is -3.32 Chg 1.47
A trader buys a call option on a share for K2. The stock price is K25 and the strike price is K20. State the circumstances under which the trader will make a profit. State the circumstances under which the option will be exercised. Draw a diagram in support of your answers above, showing the variation of the trader’s profit with the stock price at the maturity of the option.
An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The investor sells a call for $.50 with a strike price of $40. What is the maximum profit and loss for this position? Draw the profit and loss diagram for this strategy as a function of the stock price at expiration.
Suppose that put options on a stock with strike prices $18 and $20 cost $2 and $3.50, respectively. How can the options be used to create a bull spread? Construct atable that shows the profit and payoff for the spread.
A one-year call option on a stock with strike price of $90 costs $6 and a one-year put option on the same stock with strike price of $90 costs $7. Suppose that a trader buys one call option and one put option. a. What is the breakeven stock price, above which the trader makes a profit? b. What is the breakeven stock price, below which the trader makes a profit?
Suppose you purchase 20 call contracts on SAMSONG Co. stock. The strike price is $120, and the premium is $8. If the stock is selling for $140, $128, $120 per share at expiration, what are your call options worth? What is your net profit?

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