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 this stock with a strike price of $25 and an option price of $1.50.You also purchase a one-month put option on this stock with a strike price of $25 and an option price of $.70.What will be your total profit on these option positions if the stock price is $24.60 on the day the options expire?

Question

Quizplus · Accepted Answer

To calculate the total profit, first, we need to consider the outcomes of both the call and put options at expiration. With the stock price at $24.60, the call option with a strike price of $25 will expire worthless because the stock price is below the strike price, meaning there's no incentive to exercise the option. The put option, however, will be in the money because the strike price is above the stock price. The intrinsic value of the put option is $25 - $24.60 = $0.40. However, since you paid $1.50 for the call option and $0.70 for the put option, your total cost is $1.50 + $0.70 = $2.20 per share or $220 for a standard contract of 100 shares. Since the put option's intrinsic value is $0.40 per share, or $40 for 100 shares, and you spent $220 on premiums, your total profit (actually, loss) is $40 (from exercising the put option) - $220 (total premiums paid) = -$180.

The Market Price of ABC Stock Has Been Very Volatile