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# 5309545 isyourpercentageprofitwithoptions

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Unformatted text preview: What is the cost of your contract? Cost = \$.95 x 100 = \$95 If the current stock price is \$28.48. Is your contract in­the­money? No, so the intrinsic value is \$0 per share. Options Options Example (cont.): What is your dollar profit (loss) if, at expiration, Microsoft is selling for \$25? Out­of­the­money, so Profit = (\$95) Is your percentage profit with options? Return = (0­.95)/.95 = (100%) What if you had invested in the stock? Return = (25­28.48)/28.48 = (12.22%) Options Options Example (cont.): What is your dollar profit (loss) if, at expiration, Microsoft is selling for \$30.50? Profit = 100(30.5­30) – 95 = (\$45) Is your percentage profit with options? Return = (30.50­30­.95)/.95 = (47.37%) What if you had invested in the stock? Return = (30.50­28.48)/28.48 = 7.09% Options Options Example (cont.): What is your dollar profit (loss) if, at expiration, Microsoft is selling for \$35? Profit = 100(35­30) – 95 = \$405 Is your percentage profit with options? Return = (35­30­.95)/.95 = 426.32% What if you had invested in the stock? Return = (35­28.48)/28.48 = 22.89% Option Trading Strategies Option Trading Strategies There are a number of different option strategies: Buying call options Selling call options Buying put options Selling put options Buying Call Options Buying Call Options Position taken in the expectation that the price will increase (long position) Profit for a purchasing a Call Option: Per Share Profit =Max [0, V­X] – Call Premium Note that profits on an option strategy include option payoffs and the premium paid for the option The following diagram shows different total dollar profits for buying a call option with a strike price of \$70 and a premium of \$6.13 Buying Call Options Buying Call Options 3,000 Profit from Strategy 2,500 Exercise Price = \$70 2,000 Option Price = \$6.13 1,500 1,000 500 0 (500) (1,000) 40 Stock Price at Expiration 50 60 70 80 90 100 Selling Call Options Selling Call Options Bet that the price will not increase greatly – collect premium income with no payoff Can be a far riskier strategy than buying the same...
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