Homework Help

How to calculate the profit of a call or put of a stock? Both a call and a put...

user profile pic

wngadea | Student, Undergraduate | eNotes Newbie

Posted February 11, 2013 at 2:31 AM via web

dislike 0 like

How to calculate the profit of a call or put of a stock?

Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months.

a.

What will be the profit to an investor who buys the call for $4.8 in the following scenarios for stock prices in 6 months? (a) $40; (b) $45; (c) $50; (d) $55; (e) $60. (Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

  Stock price           Profit a.   $ 40   $    b.   $ 45   $    c.   $ 50   $    d.   $ 55   $    e.   $ 60   $    b.

What will be the profit to an investor who buys the put for $7.5 in the following scenarios for stock prices in 6 months? (a) $40; (b) $45; (c) $50; (d) $55; (e) $60. (Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

  Stock price           Profit a.   $ 40   $    b.   $ 45   $    c.   $ 50   $    d.   $ 55   $    e.   $ 60   $   

1 Answer | Add Yours

user profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

Posted February 11, 2013 at 3:56 AM (Answer #1)

dislike 1 like

A person buying an option has the right to exercise the option but is not obligated to do so at expiry. If a call option has been bought and the price of the underlying at expiry in the open market is greater than the strike price of the option, the option buyer can demand the option seller sell the underlying at the strike price and trade it in the market for a profit. Similarly, if the price of the underlying at expiry is lower than the strike price the buyer of a put option has the right to sell the underlying to the option seller at the strike price. As the market rate is less than the strike price, the difference in market price and strike price is the profit made by the option buyer.

In the question, the call option with a strike price of $50 can be bought at $4.8. If the price of the underlying at expiry is greater than $54.8 the buyer of the call option makes a profit. The profit for the prices given is:

$40: -14.8

$45: -9.8

$50: -4.8

$55: 0.2

$60: 5.2

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes