HomeworkLib
Question

Call Option

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $142 and IBM's stock currently trades at $148. The option premium is $7 per contract.
 
a. How much of the option premium is due to intrinsic value versus time value?
b. What is your net profit on the option if IBM’s stock price increases to $158 at expiration of the option and you exercise the option?
c. What is your net profit if IBM’s stock price decreases to $138?

finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Answer (a)

Given

Market price =$148

Exercise price = $142

Option Premium = $7

Intrinsic Value = Market price - Exercise price = $148 - $142 = $6

Time Value = Option Premium - Intrinsic Value = $7 - $6

Answer (b)

Market price = $158

Exercise price = $142

Gross Payoff = Market price - Exercise price = $158 - $142 = $16

Net Profit = Gross pay off - Option Premium = $16- $7 = $9

Answer (c)

Market price = $138

Exercise price = $142

Gross pay off = NIL ( note 1)

Net Profit = Gross Pay off - Option Premium = 0 - 5 = -5

Note: -

The call option is exercised if " Market Price > Exercise Price " in the given case Exercise Price > Market price; hence the option is not exercised.


answered by: Blacketi
1 0
Add a comment
Know the answer?
Add Answer to:
Call Option
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • You have taken a long position in a call option on IBM common stock. The option...

    You have taken a long position in a call option on IBM common stock. The option has an exercise price of $144 and IBM's stock currently trades at $148. The option premium is $6 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit on the option if IBM’s stock price increases to $158 at expiration of the option and you exercise the option? c. What is...

  • You have taken a long position in a call option on IBM common stock. The option...

    You have taken a long position in a call option on IBM common stock. The option has an exercise price of $148 and IBM's stock currently trades at $153. The option premium is $7 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit on the option if IBM’s stock price increases to $163 at expiration of the option and you exercise the option? c. What is...

  • You have taken a long position in a call option on IBM common stock. The option...

    You have taken a long position in a call option on IBM common stock. The option has an exercise price of $147 and IBM's stock currently trades at $152. The option premium is $6 per contract. a. How much of the option premium is due to intrinsic value versus time value? Option Premium Intrinsic value $ Time value b. What is your net profit on the option if IBM’s stock price increases to $162 at expiration of the option and...

  • Call Option You have taken a long position in a call option on UBR common stock....

    Call Option You have taken a long position in a call option on UBR common stock. The option has an exercise price of $142 and IBM’s stock currently trades at $145. The option premium is $6 per contract. a. What is your net profit on the option if UBR’s stock price increases to $150 at expiration of the option and you exercise the option? b. How much of the option premium you paid is due to intrinsic value and how...

  • You have written a call option on Walmart common stock. The option has an exercise price...

    You have written a call option on Walmart common stock. The option has an exercise price of $87, and Walmart’s stock currently trades at $85. The option premium is $1.25 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $83 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price...

  • You have written a call option on Walmart common stock. The option has an exercise price...

    You have written a call option on Walmart common stock. The option has an exercise price of $78, and Walmart's stock currently trades at $76. The option premium is $1.45 per contract a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart's stock price decreases to $74 and stays there until the option expires? c. What is your net profit on the option if Walmart's stock price...

  • You have written a call option on Walmart common stock. The option has an exercise price...

    You have written a call option on Walmart common stock. The option has an exercise price of $80, and Walmart’s stock currently trades at $78. The option premium is $1.55 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $76 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price...

  • IBM sells a call option on euros (contract size is €600,000) at a premium of $0.02...

    IBM sells a call option on euros (contract size is €600,000) at a premium of $0.02 per euro. If the exercise price is $1.44/€ and the spot price of the euro at date of expiration is $1.45/€, A. Will this option be exercised, that is, is in-the-money or out-of-the-money? Why? (2 points) B. What is IBM’s profit (or loss) on the call option? (3 points)

  • Consider the following option portfolio: You write a January 2012 expiration call option on IBM with...

    Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price $172, and the price of the call option is $8.93. You also write a January expiration IBM put option with exercise price $167, the price of the put option is $10.85. Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent. a. What will be the profit/loss on this position if IBM is selling...

  • Consider the following option portfolio: You write a January 2012 expiration call option on IBM with...

    Consider the following option portfolio: You write a January 2012 expiration call option on IBM with exercise price $170, and the price of the call option is $8.93. You also write a January expiration IBM put option with exercise price $165, the price of the put option is $10.85. Instructions: for parts a, b, and c, enter your answer as a decimal rounded to the nearest cent. a. What will be the profit/loss on this position if IBM is selling...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT