Examine the profit and losses for the writer (seller) of the call option. What constitutes the maximum profit for the call writer, and what represents the maximum loss for the call writer?
Exploring six-month call and put options for a stock with an exercise price of $20 and a call premium of $4 per contract, your consideration involves the potential purchase of 20 call options. Let's analyze the following scenarios:
a) In the context of contemplating the acquisition of 20 call options, visualize the
b) Examine the profit and losses for the writer (seller) of the call option. What constitutes the maximum profit for the call writer, and what represents the maximum loss for the call writer?
c) Shift attention to a put option for the same stock, sharing the same strike price and maturity, traded on the market at a price of $3. Present the profit and losses at the expiration date for the buyer of the put option, excluding transaction costs. Evaluate the potential gain if the stock price drops to $12 in six months, determine the break-even point, and calculate the potential gain if the stock price climbs to $27 in six months. Identify the conditions leading to the maximum profit for the put option buyer.
d) Delve into the profit and losses for the writer (seller) of the put option. Specify the maximum profit for the put writer and outline the maximum loss for the put writer.
Step by step
Solved in 3 steps
