Log in
Finance
1
answer
0
watching
69
views
14 Jun 2018

Consider two options on IBM stock a put and a call . Each has a an exercise price identical to the current market price. Each expires in 3 months.
What would happen if IBM stock price risesb?

Watch
1
answer
0
watching
69
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Casey Durgan
Casey DurganLv2
16 Jun 2018

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

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 profit/loss on this position if IBM is selling at $157 on the option expiration date? $

b. What will be the profit/loss 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: $

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.

In the most recent Berkshire Hathaway's annual meeting in Omaha, NE, Warren Buffett said he shed a third of his holdings in IBM due to the highly competitive environment IBM is facing. Shortly after, "Mad Money" Jim Cramer expressed his still bullish outlook for the company by pointing out some possible transformational acquisitions IBM could make for new growth opportunities. Nevertheless, the two ideas represent the mainstream now. Suppose you are not sure about the direction of the stock price movement but believe the stock price of IBM will be more volatile than usual in the next three months, you want to bet on the volatility. You are looking at a call option on IBM with strike price of $155 selling at $3.75 and a put option with strike price of $155 selling at $4.84 (real time market data on May 7, 2017). Both options will expire on Jul. 21, 2017. What option trading strategy you can employ based on the above two options so you could exploit the possible highly volatile IBM stock price movement in the next three months? Plot the trading strategy profit diagram and point out in what price range your trading strategy will see a profit.

Use Chart for 1-6
Stock Strike Price Market Price Strike Price Market Price
Prices ofCall ofcall ofput of put
Ford $8.50 $7.50 $1.90 $7.50 $1.00

IBM $95.50 $90.00 $9.50 $90.00 $1.00

Kroger $28.25 $30.00 $1.10 $30.00 $2.55

1) If you buy 100 shares of ford at the price given and 1 callcontract (1 contract=100 shares), your out of pocket costs for bothpositions is:
(this can also be called going long the stock and long the calloption).

2) If you buy 100 shares of IBM at the price given and 1 callcontract (1 contract =100 shares), your out of pocket costs forboth positions is:

3) If you buy 100 shares of IBM at the price given and sell 1 callcontract (1 contract= 100 shares), your out of pocket costs forboth positions is:

4)If you buy 100 shares of IBM at the price given and BUY 1 Putcontract ( 1 contract=100 shares), your out of pocket costs forboth positions is:

5)If you buy 1 Call contract on Ford at the price given and BUY 1Put contract (1 contact=100 shares), your out of pocket costs forboth positions is:

6) If you sold 1 Call contract on IBM at the price given and sold 1Put contract (1 contract = 100 shares), your out of pocket costsfor both positions is:
(This can also be called "going short the call and short the putoption).

7) You buy one Ford Call at today's price. At the call'sexpiration, the stock is trading at $10 per share. What is yourtotal profit (1 contract is based on 100 shares)?

8) You buy 1 put on Kroger; at expiration, Kroger is trading at $31per share. What is the profit/loss of this option position?

9) Assume you can either buy IBM stock or one call on IBM at theprices quoted. Assume that at the option's expiration (actual datenot given, but sometime in the future), IBM is trading at $105 pershare. The holding period return is the ending value less beginningvalue divided by the beginning value. What is the % return fromholding each position from today until the option expires?

10)For the Call on Ford stock, what is the exercise value (pershare)?

11)For the call on IBM, what is the premium paid for the option (atthis moment in time)?

12)For the call on Kroger, if it is purchased at the market price,how much of a price increase in the stock is needed to breakeven onthe trade?

13)For the put on Ford, what is the premium paid for the option (atthis moment in time)?

14)For the put on IBM, what is the break-even if you are long thestock and purchased the put at today's value?
(Long the stock means you own the stock (at today's price) and yourpurchas at put at today's price).

15) For the put on Kroger, that is the premium paid for the putoption (at this moment in time)?

Related Documents

FIN 501
Final Exam
Study Guide
FIN 501 Study Guide - Call Option, Put Option, Straddle
beigefish258
FIN 401 Chapter Notes - Chapter 25: Underwriting, Call Option, Montreal Exchange
ochreprairie-dog861
FIN 501 Chapter Notes - Chapter 14: Option Type, Strike Price, Put Option
viridianfish136

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in