Example 1
:
ABC trades at $97.50.
ABC calls with an exercise price of $95 trade at
$6.25 and ABC puts with an exercise price of $93 trade for $0.90.
What are the intrinsic
values and time values for these options?
Intrinsic Value
Time Value
ABC 95 Calls
PX = (97.50 – 95)=$2.50
Vc – IV = (6.25 – 2.50)=$3.75
ABC 93 Puts
XP = $0
Vp – IV = $0.90
Example 2
:
An investor buys a call option with a strike price of $35.
The option price is
$6.50.
Draw a payoff table and a profit/loss diagram.
What is the breakeven price?
What is the maximum gain on this position?
What is the maximum loss?
If at maturity
the stock price is $43, what is the total profit/loss?
Price of stock @
expiration
25
30
35
40
45
Cost of Call
Gain/loss
Net payoff
Example 3
: An investor writes a call option with a strike price of $35.
The option price is
$6.50.
Draw a payoff table and a profit/loss diagram.
What is the breakeven price?
What is the maximum gain on this position?
What is the maximum loss?
If at maturity
the stock price is $43, what is the total profit/loss?
Price of stock @
expiration
25
30
35
40
45
Cost of Call
Gain/loss
Net payoff
Example 4
: An investor buys a put option with a strike price of $20.
The option price is
$4.00.
Draw a payoff table and a profit/loss diagram.
What is the breakeven price?
What is the maximum gain on this position?
What is the maximum loss?
If at maturity
the stock price is $22, what is the total profit/loss?
Price of stock
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 Spring '11
 Mishra
 Finance, Options, Strike price

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