Test Answers

a) In-the-money – the amount by which the market price of the stock exceeds the strike price of the call. Similarly, the amount by which the market price of a stock is below the strike price of the put.

b) At-the-money – an option whose strike price is equal to the current market value of the underlying stock

c) Out-of-the-money – A call option whose strike price is above the market price of the stock. Similarly a put option whose strike price is below the market price of the stock.

a) $1.60 extrinsic value

b) $.50 intrinsic value, $1.60 of extrinsic value

c) $.85 extrinsic value

d) $1.30 extrinsic value

e) $.75 intrinsic, $1.00 extrinsic

f) $1.10 extrinsic

g) $.60 extrinsic

h) $2.30 intrinsic, $.60 extrinsic

i) $2.60 intrinsic, $1.20 extrinsic

j) $.70 intrinsic, $.85 extrinsic

k) $.80 intrinsic, $1.00 extrinsic

a) XYZ is the stock symbol

b) May is the expiration month

c) 40 is the strike price

d) A call gives the buyer the right but not the obligation to purchase a specific underlying security at a specific price by a specific date.

a) in-the-money Parity = $.30

b) in-the-money Parity = $9.30

c) out-of-the-money Parity = $0

d) in-the-money Parity = $1.10

e) at-the-money Parity = $0

f) at-the-money Parity = $0

g) in-the-money Parity = $.50

h) out-of-the-money Parity = $0

a) Closing, you are decreasing an existing position. You want the stock to trade down or remain the same because you are still short 5 May 30 calls

b) Opening, you are starting a position. You want the stock to go down because you are long 27 May 10 puts.

c) Opening, you are adding to an existing position. You want the stock to go up because you are long 25 May 15 calls.

d) Closing, you are decreasing an existing position. You want the stock to go up because you are still long 10 May 15 calls.

e) Closing, you are decreasing an existing position. You want the stock to go down or stay the same because you are still short 10 May 40 calls.

f) Closing, you are decreasing an existing position. You do not care where the stock goes because you no longer have a position.

g) Opening, you are starting a new position. You want the stock to go down or stay the same because you are short 10 May 25 calls.

a) You can buy the stock, buy a call, or sell a put.

b) You can sell the stock, buy a put, or sell a call.

a)

1) $53.00

2) $42.50

3) $43.00

4) $33.50

b)

1) You lose the most money at $50.00 or below. Maximum loss is $3.00, the amount you spent on the call purchase

2) You lose the most money at $45 .00 or above. Maximum loss is $2.00, which is the amount you spent on the put purchase.

c)

1) You would make the most money with the stock at $40.00 or below. Your maximum loss is unlimited, dollar for dollar over $42.50.

2) You would make the most money with the stock at $35.00 or above. Your maximum loss is unlimited in theory. With the stock at 0 your maximum loss is $33.50.

d) You would lose $1.80. The 50 strike call that you own is worth $1.20 and you spent $3.00 for it. This leaves a $1.80 loss.

e) You would make $1.25. The option you sold is now worth $1.25 and you sold it for $2.50. This leaves you $1.25 profit.

f) You would lose $.10. With the stock at $43.10, the put would be worth $1.90. It was purchased for $2.00 which is a $.10 loss.

g) You would lose $.30. With the stock at $33.20, the option will be worth $1.80. You sold it at $1.50 thus incurring a $.30 loss.

a) $10.30

b) $11.80

c) $20.25

d) $4.60

e) $25.90

f) $16.30

g) $16.50

h) $42.50

i) $15.85

j) $44.70

k) $21.70

l) $26.50

m) $16.60

n) $15.25

o) $23.75

a) HD is the underlying, 40 is the exercise price, expiration is in January

b) PG is the underlying, 70 is the exercise price, expiration is in May

c) ABT is the underlying, 60 is the exercise price, expiration is in August

d) IBM is the underlying, 75 is the exercise price, expiration is in November

e) TYC is the underlying, 25 is the exercise price, expiration is in July

f) JPM is the underlying, 35 is the exercise price, expiration is in February

a)

JPM Jul 35 call is in-the-money $1.50
JPM Jul 35 put is out-of-the-money $1.50

b)
LOW Jan 65 call is out-of-the-money $1.80
LOW Apr 60 call is in-the-money $3.20

c)
PG May 70 call is in-the-money $4.75
PG May put is out-of-the-money $4.75

d)
LEH Dec 70 call is in-the-money $2.40
LEH Jul 75 put is in-the-money $2.60

e)
MO Jan 45 call is out-of-the-money $2.65
MO Feb 40 put is out-of-the-money $2.35

a) Option premium = $10.25, intrinsic value is $8.50, extrinsic value is $1.75

b) Option premium = $2.50, intrinsic value is $.75, extrinsic value is $1.75

c) Option premium = $1.00, intrinsic value is $0, extrinsic value is $1.00

d) Option premium = $1.05, intrinsic value is $0, extrinsic value is $1.05

e) Option premium = $9.60, intrinsic value is $7.70, extrinsic value is $1.90

f) Option premium = $2.25, intrinsic value is $2.25, extrinsic value is $0.00