Question

A. calculate the payoff and profit at expiration for the february 190 calls, if you purchase the option at the stated price and at expiration the stock price is $195.

b. calculate the payoff and profit at expiration for the february 195 puts, if you purchase the option at the stated price and at expiration the stock price is $195.

Answer 1

(a) The Net Payoff: 6.75+5 = - 1.75 (b) Net payoff : 5

Note: Kindly find an attached image to the solution below

Sources: The image was researched from Course hero

Step-by-step explanation:

Solution

Given that:

The call value goes higher when the underlying price increases and vice versa.

The premium value of put goes higher when underlying market decreases and vice versa.

The call value = Spot price - strike price (minimum zero)

The put value = Strike price - spot price (minimum zero

(1): Trade: Buy February Call

Now

The Strike Price: $ 190

The Call Premium paid: $ 6.75

The Stock Price on Expiry: $ 195

Value of call on expiry: $ 5

The Net Payoff: 6.75+5 = - 1.75

(2). Trade: Buy February Put

The Strike Price: $195

Put Premium: $ 5.00

Stock Price on Expiry = $ 195

Value of Put on Expiry: 0

Net payoff : 5