# Chapter 24 - Options 24-1: 24-2: ANSWERS TO QUESTIONS & PROBLEMS

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2 24-3: OLTHETEN & WASPI 2012 A and D coincide at prices above \$40 (where the option is exercised). The value of the \$40 call option (A) is the same as the profit of the underlying shares when the shares are sold short at \$40 (D) so long as GE remains in the money. However, when GE is below \$40 the option expires worthless. The vertical distance between the value and the profit on the shares is \$4000: the value of the shares when they were sold short. The vertical distance between the value and the profit on the call option is \$250: the premium when the option was written.

3 24-4: A and D coincide at prices below \$40 (where the option is exercised). The value of the \$40 put option (A) is the same as the profit on the underlying shares when the shares are short sold at \$40 (D). The vertical distance between the value and the profit on the shares is \$4000: the price of the shares when they were short sold. The vertical distance between the value and the profit on the call option is \$270: the cost of the option.

4 24-5: OLTHETEN & WASPI 2012 A and D coincide at prices below \$40 (where the option is exercised). The value of the \$40 put option (A) is the same as the profit on the underlying shares when the shares are purchased at \$40. The vertical distance between the value and the profit on the shares is \$4000: the purchase price of the shares. The vertical distance between the value and the profit on the call option is \$270: the premium collected when the option was written.

5 24-6: Figure 24-7: Written/Short Put. We can tell that it is short because when the option is exercised it generates a loss. We can tell that it is a Put because it is exercised when prices go down. The value line is horizontal at \$0 where the option expires worthless. The profit line has both a positive and a negative part. Figure 24-8: Purchased/Long Call. We can tell that it is long because when the option is exercised it generates a profit. We can tell that it is a Call because it is exercised when prices go up. The value line is horizontal at \$0 where the option expires worthless. The profit line has both a positive and a negative part. Figure 24-9: Written/Short Call. We can tell that it is short because when the option is exercised it generates a loss. We can tell that it is a Call because it is exercised when prices go up. The value line is horizontal at \$0 where the option expires worthless. The profit line has both a positive and a negative part. Figure 24-10: Purchased/Long Put. We can tell that it is long because when the option is exercised it generates a profit. We can tell that it is a Put because it is exercised when prices go down. The value line is horizontal at \$0 where the option expires worthless. The profit line has both a positive and a negative part. 24-7: A. This option is in-the-money. The buyer of the option (John Q. Investor) can exercise the option, buying shares of GE from you at \$30 and selling them in the market at \$35. The value of the option is positive. Thus the option is in-the-money. B. Yes, JQ will exercise these options since they are in the money. C. JQ realizes a loss of \$5,200. Exercising ten option contracts allows him to buy 1000 shares of GE from you at \$30 per share. He can then sell them at \$35. The value of the option is thus \$5,000. However, since he bought the options for \$10,200 he realized a net loss of \$5,200 from the investment. Even an in-the-money option need not necessarily generate a profit when the premiums are factored in. D. If JQ does not exercise the options he loses the entire \$10,200. E. You were forced to sell 1000 shares of GE at \$30 when theywereworth \$35. This generated a loss of \$5,000. However you sold the options for a premium of \$10,200. Therefore your profit on the transaction is \$5,200.

6 OLTHETEN & WASPI : A. The 70 April Call is quoted at so Susan pays \$100 * = \$45.00 for the option. B. 1. At 6.0% and 6.5% the 70 Call is out of the money. It expires worthless. 2. At 7.0% the 70 Call is at the money. It expires worthless. 3. At 7.5% the 70 Call is in the money and Susan exercises. The value of the option is \$100 (75-70) = \$500. Susan realizes a profit of \$ At 8.0% the 70 Call is in the money and Susan exercises. The value of the option is \$100 (80-70) = \$1000. Susan realizes a profit of \$ C.

7 D. The 70 April Put is quoted at so Susan pays \$100 * = \$ for the option. E. 1. At 6.0% the 70 Put is in the money and Susan exercises. The value of the option is \$100 (70-60) =\$1,000. Susan realizes a profit of \$ At 6.5%the70Put is in the money and Susan exercises. The value of the option is \$100 (70-65) = \$500. Susan realizes a profit of \$ At 7.0% the 70 Put is at the money. It expires worthless. 4. At 7.5% and 8.0% the 70 Put is out of the money. It expires worthless. F.

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