Chapter $25$ Options

A stock is currently trading for $$25$ per share and an investor is interested in the following

two options with a one$-$year expiration term.

Options Strike Price Quoted Price

Call $$28$ $$2$

Put $$24$ $$4$

a$)$ Calculate the intrinsic values of the call and put.

b$)$ Draw the profit diagram for a short position in the put option described above. Label

the diagram well. Show all the critical points on the diagram. For example, the

intercepts on axes, maximum profit or maximum loss. What price movements are

required for the investor to have a positive profit?

c$)$ Draw the profit diagram for a long position in the call option. And label the diagram

well.

d$)$ Suppose one month later, the stock price moves up to $$30$ per share, how will the

prices of the call and put change? Why? Briefly explain.

e$)$ Suppose an investor purchased $10$ contracts of the $28$ calls and sold $10$ contracts of

the $24$ puts. If the stock price turns out to be $$30$ per share in one month, what is the

total profit for this investor?