1. Define a call and put option. Using the following examples explain what the investor is receiving.Buy an XYZ July 50 call @ $2.10. Buy an XYZ October 85 put @ $1.75. Sell an XYZ April 40 put @ $3.50. Sell an August 55 call $1.90.
2. A stock is trading for $78 per share and the July 80 call is trading for $1.25. What is the profit or loss in dollars and in percentage for both the stock and the option if the stock increases to $85 per share at July expiration (call will trade at its intrinsic value at expiration)? What is the loss in price and percentage for the stock and the option if the stock falls to $70 per share at July expiration?
3. A stock is trading for $59 per share and the investor has a choice of either selling the stock short (feels the stock will decrease in value) or can buy a July 60 put @ $2.50. What is the profit in loss in dollars and percentage for the stock and the put if the stock falls to $52 per share? What happens if the investor is wrong and the stock increases to $70 per share?