The market price of ABC 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 share with a strike
Price of €25 and an option price of €1.30.You also purchase a one-month put option on ABC 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 share price is €24.60 on the day the options expire?

Question

Quizplus · Accepted Answer

If the share price is €24.60 on the day the options expire, the call option will not be exercised because the strike price is higher than the share price. Therefore, the loss on the call option will be the premium paid of €1.30. 
On the other hand, the put option will be exercised as the strike price is higher than the share price. So the profit on the put option will be the difference between the strike price and the share price, minus the premium paid. 
Profit on put option = (€25 - €24.60) - €0.50 = €0.90 
Thus, the total profit or loss will be: 
Total profit/loss = Profit on put option - Loss on call option 
Total profit/loss = €0.90 - €1.30 = -€0.40 
Hence, the best choice is B, a loss of €140.

The Market Price of ABC Has Been Very Volatile and You