The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks. Thus,you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30. You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.50. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?

Question

Quizplus · Accepted Answer

If the stock price is $24.60, then both the call and put options are out of the money, meaning they have no intrinsic value. The call option has a total cost of $1.30, and the put option has a total cost of $0.50. Therefore, the total cost of the options is $1.80. Since the options expired worthless, the investor experiences a total loss of $1.80, resulting in a total profit or loss of -$180 (B).

The Market Price of ABC Stock Has Been Very Volatile