What will be the proceeds and net profits to an investor who purchases the January expiration IBM
QUESTION
a. What will be the proceeds and net profits to an investor who purchases the January expiration IBM calls with exercise price $125 if the stock price at expiration is $135? What if the stock price at expiration is $115?
b. Now answer part (a) for an investor who purchases a January expiration IBM put option with exercise price $125.
Part (a) Call Option When stock price at expiration is $135:- Since the stock price has gone up from $125 to $135, the call option is exercised. Proceeds = $135-$125 = $10 Profit = Proceeds Premium = $10 0 = $10 Note: Assuming premium price is zero, profit is equal to the proceeds which is $10. When stock price at expiration is $115:- Since the stock price has gone down from $125 to $115, the call option lapses. Proceeds = 0 Profit = Proceeds Premium = 0 0 = 0 Note: Assuming premium price is zero, profit is equal to the proceeds which is 0. Part (b) Put Option When stock price at expiration is $135:- Since the stock price has gone up from $125 to $135,
the put option lapses. Proceeds = 0 Profit = Proceeds Premium = 0 0 = 0 Note: Assuming premium price is zero, profit is equal to the proceeds which is 0. When stock price at expiration is $115:- Since the stock price has gone down from $125 to $115, the put option is exercised. Proceeds = $125-$115 = $10 Profit = Proceeds Premium = $10 0 = $10 Note: Assuming premium price is zero, profit is equal to the proceeds which is $10.
ANSWER:
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