1. An investor purchased a call option for $2.00 two months ago that allows the investor to purchase one share at $30. The option is now about to expire.
a. Construct a table of the investor’s profit (loss) given the following stock prices at expiration: $10, 15, 20, 25, 30, 35, 40, 45, 50.
b. Now construct a table assuming the option had been a put option instead of a call option.
c. Graph the profit/loss schedules in parts (a) and (b). Indicate at what stock prices the investor would breakeven with both the call and put options.
d. If the investor had purchased both the call and the put, what type of strategy would they be using?
2. An investor owns a share of 3M (originally purchased at $55) and writes a call option on the same stock and sells it for $3.00 with an exercise price of $55.
a. In what type of strategy has the investor engaged?
b. Construct a table showing the profit (loss) to the investor assuming the following stock prices when the call option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you must consider both the profit (loss) on the 3M stock and the option.)
c. Now assume instead of writing a call option, the investor bought a put option at the same price. What type of strategy is this?
d. Given (c) above, construct a table showing the investors profit (loss) assuming the following stock prices when the put option expires: $30, 35, 40, 45, 50, 55, 60, 65, 70. (Note you must consider both the profit (loss) on the 3M stock and the option.)
3. You currently own both a call option and a put option on the same stock. Explain what will happen to the prices (values) of both options given the following changes, and justify your reasons. Consider each change as independent of the other changes.
a. The price of the underlying stock decreases.
b. The time to maturity of the option nears.
c. The underlying stock becomes more volatile.
d. The underlying stock increases its dividends.
4. What’s the profit of the “Straddle” when stock price is $25, $30, $35, $40, $45, $50, $55, and $60 respectively?
–Stock Price = $40.00
–Call Option Price = $4.00
–Put Option Price=$3.00
–Exercise Price = $40.00
5. What’s the profit of the “Bullish Call Spread” when stock price is $25, $30, $35, $40, $45, $50, $55, and $60 respectively?
–Stock Price = $40.00
–Current Option price = 7.0 (Call 35)
–Current Option price = 2.0 (Call 45)
–Exercise Price = $40.00