Reading 75: Risk Management Applications of Option Strateg option, market, current, investor, net

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1.An investor buys a call option that has an option premium of $5 and a strike price of $22.50. The current market price of the stock is $25.75. At expiration, the value of the stock is $23.00. The net profit/loss of the call position is closest to:

A)   -$4.50.

B)   $4.50.

C)   -$5.00.

D)   $0.75.

2.Mosaks, Inc., has a put option with a strike price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is:

A)   $10.

B)   $0.

C)   $100.

D)   $105.

3.Consider a call option with a strike price of $32. If the stock price at expiration is $41, the value of the call option is:

A)   $0.

B)   $9.

C)   $32.

D)   $41.

4.An investor purchases a stock for $40 a share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3/share. Ignoring dividends and transactions cost, what is the maximum profit that the writer of this covered call can earn if the position is held to expiration?

A)   $2.

B)   $5.

C)   $3.

D)   $8.

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答案和详解如下：

1.An investor buys a call option that has an option premium of $5 and a strike price of $22.50. The current market price of the stock is $25.75. At expiration, the value of the stock is $23.00. The net profit/loss of the call position is closest to:

A)   -$4.50.

B)   $4.50.

C)   -$5.00.

D)   $0.75.

The correct answer was A)

The option is in-the-money by $0.50 ($23.00 – $22.50). The investor paid $5.00 for the call option, thus the net loss is –$4.50 ($0.50 – $5.00).

2.Mosaks, Inc., has a put option with a strike price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is:

A)   $10.

B)   $0.

C)   $100.

D)   $105.

The correct answer was B)

The put has a value of $0 because it will not be exercised. Put value is MAX (0, X-S).

3.Consider a call option with a strike price of $32. If the stock price at expiration is $41, the value of the call option is:

A)   $0.

B)   $9.

C)   $32.

D)   $41.

The correct answer was B)

The call has a $9 ($41-$32) value at expiration, because the holder of the call can exercise his right to buy the stock at $32 and then sell the stock on the open market for $41. Remember, the intrinsic value of a call at expiration is MAX (0, S-X).

4.An investor purchases a stock for $40 a share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3/share. Ignoring dividends and transactions cost, what is the maximum profit that the writer of this covered call can earn if the position is held to expiration?

A)   $2.

B)   $5.

C)   $3.

D)   $8.

The correct answer was B)

This is an out of the money covered call. The stock can go up $2 to the strike price and then the writer will get $3 for the premium, total $5.