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Homework answers / question archive / Question 7 1 pts Which of the following statements is CORRECT? An option to buy a stock will generally be priced below its exercise value, and the lower the exercise value, the lower the premium on the option is likely to be
Question 7 1 pts Which of the following statements is CORRECT? An option to buy a stock will generally be priced below its exercise value, and the lower the exercise value, the lower the premium on the option is likely to be. If Larry writes a call option against a stock held in his portfolio he is said to be selling an "out-of-the-money" option. Because of their levered return profile, call options will typically sell for a price that is less than their intrinsic value. John wrote an at the money put option. If the price of the stock rises above the strike price by the time the option expires, John will profit.
Question 8 1 pts Harry thinks Big Slop Inc's stock price is going to decline from its current level of $82.50 sometime during the next 4 months. Harry can buy a 4-month put option on Big Slop's stock for $5.10. The put option has a strike price of $85.00. If Harry bought this option for $5.10 and Big Slop's stock price dropped to $60 by the time the option expires, what would Harry's profit be? $19.90 -$5.10 $22.50 0 0 0 0 $25.00 $17.40
Explanation: Put option writer has the obligation to buy the stock if the price of the stock get down below excercise price. If the john had already wrote an at the money put option then he will be in profit by getting whole option premium, if the price of the stock rises at the time of expiry.
8.
Profit in put option: (Strike price - actual price at expiry) - option premium paid
Profit in put option: ($ 85 - $ 60) - $ 5.10
Profit in put option: $ 25 - $ 5.10
Profit in put option: $ 19.90