Option payoffs: Kelvin's Thermostats, Inc., stock is currently trading at $20 per share. There are two types of options written on the stock. Call options with a strike price of $15, which expire next month, are currently trading at $6.00. Put options with a strike price of $15 which expire next month are currently trading at $1.00. Steve invests $120 in common stock. Carol invests $120 in the call options. Paul invests $120 in the put options. At the end of one month, the price of Kelvin's Thermostats, Inc., is $23. Who made the most money off of their investment?

Question

Quizplus · Accepted Answer

- Steve invested $120 in common stock, and the stock price increased from $20 to $23, so his investment is now worth $138. He made a profit of $18.
- Carol invested $120 in call options with a strike price of $15, which are now worth $8 ($23 - $15 = $8). Her investment is now worth $480 ($8 x 100 shares per option x 15 options). She made a profit of $360 ($480 - $120).
- Paul invested $120 in put options with a strike price of $15, which are now worthless since the stock price is higher than the strike price. He lost his entire investment of $120.

Therefore, Carol made the most money off of her investment, with a profit of $360.

Option Payoffs: Kelvin's Thermostats, Inc