1. You are cautiously bullish on a stock, currently priced at $10 per share. So, you buy 100 shares at $10 and sell a call option ("write a covered call option") with an exercise price of $12 for which you collect $1.20 per share.
You were wrong, and the company declares bankruptcy, wiping out your investment. How much money did you lose?
2. You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. How much will be your profit on this position?
3. If you believe that the stock in questions 1 & 2, above, actually has a standard deviation of its values of the 25% that you had in Question #1, but is priced as in #2, should you buy, or should you sell, this option?
4. Use the CBOE Options Valuation Tool to determine the value of an option with:
Underlying priced at $27 and pays no dividends
93 days until the option expires
You estimate the volatility of the stock's price to be 25% standard deviation.
The risk free rate today is 1%
This is an American style CALL option
Strike price is $30