Chapter-15 (Options Markets)

Put option
i/For Speculator/Buyer
Net Amount=Exercise Price-Premium Price
Profit=Net amount-Stock Price
ii/ For writer/Seller
Net Amount=Exercise Price-Premium Price
Profit=Stock Price-Net amount

Call option
i/For Speculator/Buyer
Net Amount=Exercise Price+Premium Price
Profit= Stock Price -Net amount
ii/ For writer/Seller
Net Amount=Exercise Price+Premium Price
Profit= Net amount- Stock Price

Buyer/Speculator=Loss is not more than premium value

Seller/Writer=Profit is not more than premium value

1|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Problem: 1 NU: BBA: 2007, 2011
A put option on Low a stock specifies an exercise price of $71. Today the stock’s price is $68.
The premium on the put option is $8. Assume the option will not be exercised until maturity, if at
all. Complete the following table for a speculator who purchases the put option (and currently
does not own stock):
Assumed Stock Price at the time Net Profit of Loss Per Share to be Earned
the Put option is about to expire by the Speculator/Purchaser/Buyer
$60
64
68
70
74
76
Answer:
Given that,
Exercise price = $71
Market price = $68
Premium paid to put option = $8
Premium to Profit or loss
Stock Price Exercise price Net amount
put option (per share)
(1) (2) (3) (4) = 2 - 3 (5) = 4 – 1
$ 60 $71 $8 $63 $3
64 71 8 63 -1
68 71 8 63 -5
70 71 8 63 -7
74 71 8 63 -8
76 71 8 63 -8

2|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Note: Here, loss is not more than premium value.
Problem: 2 NU: BBA: 2008
Suppose you bought an index call option for 5.50 that has a strike price of 200 and
that at expiration, you exercised it. Suppose, too, that at the time you exercised the
call option, the index has a value of Tk. 240:-
i. If the index option has a multiple of Tk. 100, how much money does the writer of
this option pay you?
ii. What profit did you realize from buying this call option?
Answer:
Given that,
Call option = 5.50
Strike price = 200
Market price = 240

Requirement (i): Multiplied by 100

New strike price = (200100) = 20000
New market price = (240100) = 24000
Writer will pay = (24000 - 20000) = 4000
Requirement (ii):
New call option = (5.50  100) = 550
Profit = 4000 - 550 = 3450
Problem: 3 NU : BBA: 2014
Suppose you bought an index call option for 8 that has a strike price of 200 and that
at expiration, you exercised it. Suppose, too, that at the time you exercised the call
option, the index has a value of 300:-
i. If the index option has a multiple of Tk. 100, how much money does the writer of
this option pay you?
3|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
ii. What profit did you realize from buying this call option?
Answer:
Given that,
Call option = 8
Strike price = 250
Market price = 300
Requirement (i): Multiplied by 100
New strike price = (250100) = 25000
New market price = (300100) = 30000
Writer will pay = (30000 - 25000) = 5000
Requirement (ii):
New call option = (8  100) = 800
Profit = 5000 - 800 = 4200
Problem: 4 NU: BBA: 2015
Suppose you bought an index call option for 10 that has a strike price of 500 and
that, at expiration, you exercised it. Suppose, too, that at time you exercised the call
option, the index has a value of 600:-
i. If the index option has a multiple of $100, how much money does the writer of
this option pay you?
ii. What profit did you realize from buying this call option?
Answer:
Given that,
Call option = 10
Strike price = 500
Market price = 600
Requirement (i): Multiplied by 100
New strike price = (500100) = 50000
4|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
 New market price = (600100) = 60000
Writer will pay = (60000 - 50000) = 10000
Requirement (ii):
New call option = (10  100) = 1000
Profit = 10000 - 1000 = 9000
Problem: 5
A call option on llinols stock specifies an exercise price of $38. Today the stock
price is $ 40. The premium on the call option is $5. Assume the option will not be
exercised until maturity, if at all. Complete the following table:
Assumed stock price at the time the call Net profit or loss per share to Be Earned
option is About to Expire by the writer/Seller of the call option.
37
39
41
43
45
48

5|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Answer:
Given that,
Exercise price = $ 38
Market price = 40
Premium on call option = 5
Stock Price Exercise price Premium Net amount Profit or loss
Expire received from (per share)
call option
(1) (2) (3) (4) = 2 + 3 (5) = 4-1
$37 $38 5 $43 5
39 38 5 43 4
41 38 5 43 2
43 38 5 43 0
45 38 5 43 -2
48 38 5 43 -5

6|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Problem: 6
A call option on Michigan stock specifies an exercise price of $55. Today the stock
price is $ 54 per share. The premium on the call option is $3. Assume the option
will not be exercised until maturity, if at all. Complete the following table For a
speculator who purchase the call options
Assumed stock price at the time the call Net profit or loss per share to Be Earned
option is About to Expire by the speculator/buyer
$50
52
54
56
58
60
62

7|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Answer:
Given that,
Exercise price = $ 55
Market price = $54
Premium on call option = $3
Stock Price Exercise price Premium Net amount Profit or loss
Expire received from (per share)
call option
(1) (2) (3) (4) = 2 + 3 (5) = 1-4
$50 $55 $3 $58 -3
52 55 3 58 -3
54 55 3 58 -3
56 55 3 58 -2
58 55 3 58 0
60 55 3 58 +2
62 55 3 58 +4

8|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Problem: 7
A put option on Indiana stock specifies an exercise price of $23. Today the stock
price is $ 24. The premium on the call option is $3. Assume the option will not be
exercised until maturity, if at all. Complete the following table:
Assumed stock price at the time the call Net profit or loss per share to Be Earned
option is About to Expire by the writer/seller of the put option.
$20
21
22
23
24
25
26

9|P a ge
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Answer:
Given that,
Exercise price = $ 23
Market price = $24
Premium on call option = 3
Determination of Profit or loss
Stock Price Exercise price Premium Net amount Profit or loss
Expire received from (per share)
call option
(1) (2) (3) (4) = 2 - 3 (5) = 1-4
$20 $23 $3 $20 0
21 23 3 20 +1
22 23 3 20 +2
23 23 3 20 +3
24 23 3 20 +3
25 23 3 20 +3
26 23 3 20 +3
Note: Here, profit is not more than premium value.
Problem: 7
Suppose a call option on stock has an exercise price of $70 and a cost of $2 and
suppose you buy the call. Identity the profit to your investment, at the call
expiration, for each of these values of the underlying stock: $25,$70,$100, $400

10 | P a g e
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Answer:
Given that,
Nature of the contract = Call option
Position = long position i.e. Buyer
Strike Price = $ 70
Premium = $2
Determination of Profit or loss
values of the Exercise price Premium Net amount Profit or loss
underlying received from (per share)
stock put option
(1) (2) (3) (4) = 2 + 3 (5) = 1-4
$25 $70 $2 $72 -$2
70 70 2 72 -2
100 70 2 72 28
400 70 2 72 328
Problem: 8
Suppose you have a long position in a call option on a futures contract, and the
strike price is 80. The futures contract price is now 87, and you want to exercise you
option. Identify the gains from exercise, specifying any cash inflow and the future
position we get (and the price of the futures contract).
Answer:
Given that,
Nature of the contract = Call Option
Position = long position i.e. Buyer
Strike Price = 80
Market Price = 87
The gains from exercise = $ 87-$80 = $7
11 | P a g e
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Problem-8-2018

suppose that you buy an alternative call option with the following terms

the underlying asset is one unit of asset P or One unit of asset Q. The strike price for asset P is 100
and Asset Q is 115. Option price is 5 per contract with an expiration date of four months from
now and the option is an American option.

i. What is the payoff from this option if at the expiration date, the price of asset P is 125
and price of Asset Q is 135?
ii. What is the payoff from this option if at the expiration date the price of asset P is 90
and Price of asset Q is 125?

Req-i

Given

Exercise price/Strike price of P=100

Exercise price/ Strike price of Q=115

Market price of P=125

Market price of Q=135

Premium/options Price=5

Gain or loss from Asset P=Market price-(exercise price+Premium)

=125-(100+5)

=125-105

=20

Gain or loss from Asset Q=Market price-(exercise price+Premium)

=135-(115+5)

=135-120

=15

12 | P a g e
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education
Req-ii

Market Price of P=90

Market price of Q=125

Gain or loss from Asset P=Market price-(exercise Price + Premium)

=90-(100+5)

=90-105

=(15)

Gain or loss from Asset Q=Market price-(exercise Price + Premium)

=125-(115+5)

=125-120

=5

13 | P a g e
Md. Nazrul Islam (01521359610)
Assistant Prof & Course Coordinator
Dhaka Business Institute (DBI)
Guest Faculty at National Institute of Design(NID)
Guest Faculty at Institute of Science Trade & Technology(ISTT)
YouTube: nazrul’s easy education