The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a one-month call option contract on ABC stock with a
Strike price of $25 and an option price of $1.30. You also purchase a one-month put option on ABC
Stock with a strike price of $25 and an option price of $.50. What will be your total proﬁt or loss on
These option positions if the stock price is $24.60 on the day the options expire?

Question

Quizplus · Accepted Answer

The call option expires worthless as the stock price ($24.60) is below the strike price ($25). The put option is in-the-money, giving a profit of $0.40 per share ($25 - $24.60). Total cost of options is $1.30 + $0.50 = $1.80 per share. Profit from put is $0.40 per share, resulting in a net loss of $1.40 per share. For 100 shares, the total loss is $140.

The Market Price of ABC Stock Has Been Very Volatile