Several rumors concerning Nu-Tek stock are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month European $10 put and a one-
Month European $10 call on this stock. The call premium is $.35 and the put premium is $1.60. What
Will your net proﬁt or loss be on these option positions if the stock price is $7 on the day the options
Expire? Ignore trading costs and taxes.
A) -$495
B) -$35
C) $105
D) $140
E) $175

Question

Quizplus · Accepted Answer

If the stock price is $7 on the day the options expire, the put option will be in-the-money and the call option will be out-of-the-money. The payoff for the put option will be:

$10 - $7 - $1.60 = $1.40

The payoff for the call option will be zero. Therefore, the net profit will be:

$1.40 - $.35 = $1.05

Option C is the only one that matches this result.

Several Rumors Concerning Nu-Tek Stock Are Causing the Market Price