Several rumors concerning Nu-Tek stock are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month European $10 put and a one-month European $10 call on this stock. The call premium is $.35 and the put premium is $1.60. What will your net profit or loss be on these option positions if the stock price is $7 on the day the options expire? Ignore trading costs and taxes.
A) -$495
B) -$35
C) $105
D) $140
E) $175

Question

Quizplus · Accepted Answer

The call option expires worthless as the stock price ($7) is below the strike price ($10). The put option is in-the-money, so you exercise it, making a profit of $3 per share ($10 - $7). The total profit from the put is $300 ($3 x 100 shares). The total cost of the options is $195 ($35 for the call + $160 for the put). The net profit is $105 ($300 - $195).

Several Rumors Concerning Nu-Tek Stock Are Causing the Market Price