Stock Options
this is a 9 questions test, which requires some calculations, analysis and short answers
QUESTION 1
- If you think a stock is going to go down, what kind of options position would make the most sense?
Which would be a secondary position if you wanted to make some “income”?
QUESTION 2
- AAPL is trading at $118. You write an AAPL June Call with a strike price of $120.00 for $3.25.
What is your maximum gain in dollar amount?
What is your maximum loss?
The stock rises to $125.00 and you are exercised? What is your gain or loss?
QUESTION 3
- You hold 300 shares of F at $21.00 after purchasing them for $16 last year. You still think F has
some room to run and that the price of the stock should continue to rise. However, you are concerned
the stock could fall in the next several months because of geopolitical risks.
STOCK OPTIONS 2
What kind of options position (in total contracts) should you take to offset this risk?
QUESTION 4
- You have shorted ABC Stock at $50 per share. What kind of options contract would best protect
this position in case stocks rise?
QUESTION 5
- BBY = $51
You hold 200 shares purchased at $48 a few months ago.
You’re thinking that the stock is going to “take a breather” for the next few months.
What kind of contract should you buy/sell?
Say you execute this contract with X = $52 at $3.50 per share.
The stock rises to $54 and your position is closed out. What is your profit or loss?
What would be the breakeven price on the stock for this strategy?
QUESTION 6
- What kind of strategy is a long straddle? What would you like the underlying asset to do?
QUESTION 7
- DEF is trading at $81.75. You buy a June call and put with a X = $80 on a DEF. The call costs $4
while the put is a $1.
What is/are the breakeven points?
What is your maximum loss?
The stock falls to $71. What is your loss or gain?
QUESTION 8
- A stock is trading at $73
July Calls X = 70 are $8
July Calls X = 80 are $2
STOCK OPTIONS 3
Create a debit spread.
The stock falls to $60. What is your loss or profit?
The stock rises to $90. What is your loss or profit?
What is the break-even point on the stock?
QUESTION 9
- IBM is trading at $121.
Create a put credit spread with strike prices of X = $120 @ $3 and X = $130 @ $12. What does that
look like?
The stock rises to $140. What is your profit or loss?
The stock falls to $102. What is your profit or loss?
1
Stock Falling
When a stock price the rice is falling, the stock portfolio loses value and the stockholder
must exercise the most profitable options available. The advantage of options is that you can
STOCK OPTIONS 4
make a profit even when the market goes down (Boyer & Vorkink, 2014). The options that
would make sense in case of this scenario will include;
Call options – replace the stock with options or replaces the stock with the cash
on the table.
Buying puts – this protects the stock from fall in value by allowing the owner
to sell at the strike price. It grants someone else the right to buy the same shares
at a call option.
Selling a covered call by holding one put option with the right to sell those
shares.
Initiating collars for the stock.
2
AAPL Trading PRICE = $118.00
Strike price = $120.00
Costs = 3.25
Number of shares = 100
a. Maximum Gain = (strike price-trading price- cost)
= 12000-11800-325
=-$125
b. Stock rises = $125
Maximum gain/loss = rise- cost
= (12500 – 11800- 325)
STOCK OPTIONS 5
= $375
3
Number of shares = 300
Market price = £21
Purchasing price = $16
Option positions (total contracts)
The option available under this circumstance is to buy a put option (protective put), which
allows the stockholder to strike a “price slightly less than the market price” in case the stock
value falls in future. The owner has the right to exercise the right. A call option below the
share price of $21 will allow the holder to have some gains in case the price falls. The holder
should buy a put option at $21, which will protect him from losses in case of the geopolitical
risks happening.
4
Share price at $50
The call option will be the best option under options contracts to protect the shareholder
from possible loss in future if the share price or value falls.
5
BBY = $51
Number of shares = 200
Purchasing price = $48
STOCK OPTIONS 6
Due to the expected breather of the stock value, the holder should buy a protective put
to maintain ownership of the stock to potentially reach the expected breather or target
price, while protecting the holder in case the market weakens resulting to decrease in
share price.
The holder can sell a covered call to enhance his earnings and protect him from
losses; it ensures stockholder has up-front cash, which protects holder against a
decrease in stock price.
Executing the contract at X =$52 at $3.50
Stock price = $54
The cost = (3.5200) Gain/loss = market value – purchase value Option price = execution value –cost = 52200 – 3.5* 200
=$9700
Profit on the underlying stock = (54-48)* 200
=$1200
Cost of the option = 3.5 * 200
=$700
Pre-tax profit = underlying stock profit- cost of the option
= 1200-700
STOCK OPTIONS 7
=$500
Breakeven price = strike price + cost of stock
= 54 +3.5
=£57.5 breakeven price for this strategy
6
“Long straddle strategy is a strategy for options where the trader buys both long put and
long calls on the same underlying asset with the same expiration date and strike price. The
underlying asset is the specific financial instrument, security or commodity represented in a
derivative (Boyer & Vorkink, 2014).”
7
DEF price = $81.75
Call & put = $80
Call costs = $4
Put costs= $1
Breakeven will be the strike price plus both call and put costs
Breakeven price = 80+ 4 +1
=$85
The maximum loss will be the costs of both put and call option; this occurs if the stock
remains priced at the $80 expiration price.
The holder will make profit if the share prices falls =+/-5
STOCK OPTIONS 8
Profit = $ (71-80-5)
=-$16
Maximum los = 4+1
= $5
8
Stock price = $73
July Calls X = 70 are $8
July Calls X =80 are $2
This gives us a vertical spread of $(8100) = $800 and $(2100) = $200
Maximum loss or gain when stock falls to $60
The maximum premium will be &800-$200 =$600 (total risk of the call option)
Maximum profit/loss is capped at (80-70) = 5 – the premium
Loss= &500-$600
Maximum Loss= -$100
At $60
Profit/loss = 60100-70100-600
Loss = -$1600; however, the holder will pay a maximum loss of -$100 due to the benefits
of the call option
STOCK OPTIONS 9
Stock rises to $90
If the stock rises to $90, which is the market price, the profit will be the market value
minus the breakeven value.
Profit/ loss =90100-80100-600
Profit= $400
The break-even value will be;
Break-even point = strike price plus the call costs
Break-even point = 70+8 =$78
9
IBM $121
X =$120 @$3
X =$130@12
The vertical spread will be at $1200 and $300
This is a vertical spread allows the stockholder to pay maximum premium of $900 (1200-
300)
Stock at $140
Maximum premium = 1200-300 =900
Profit /loss = (130-120)=$10
Maximum profit = 1000-900
STOCK OPTIONS
10
=$100
At $102
Profit/loss =102100-121100+900
Loss =-$1000
References
Boyer, B. H., & Vorkink, K. (2014). Stock options as lotteries. The Journal of
Finance, 69(4), 1485-1527.
