Several rumors concerning Wyslow, Inc. stock have started circulating. These rumors are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month put and a call option on this stock with an exercise price of $15. You purchased the call at a quoted price of $.20 and the put at a price of $2.10. What will be your total profit or loss on these option positions if the stock price is $4 on the day the options expire?
A) -$230
B) $870
C) $890
D) $910
E) $1,310

Question

Quizplus · Accepted Answer

The call option will expire worthless since the stock price ($4) is below the exercise price ($15). The put option will be exercised, allowing you to sell the stock at $15, resulting in a profit of $11 per share ($15 - $4). The total profit from the put is $11 - $2.10 (cost of the put) = $8.90 per share. Since the call cost $0.20, the total cost of both options is $2.30 per share. Therefore, the total profit is $8.90 - $2.30 = $6.60 per share. Assuming 100 shares per option, the total profit is $6.60 * 100 = $660. However, the correct calculation should be $11 (profit from put) * 100 shares - $230 (total cost of options) = $870.

Several Rumors Concerning Wyslow, Inc