Question

You have written a call option on Walmart common stock. The option has an exercise price of $ 74, and Walmart’s stock currently trades at $ 72. The option premium is $ 1.25 per contract. a.How much of the option premium is due to intrinsic value versus time value? b.What is your net profit if Walmart’s stock price decreases to $ 70 and stays there until the option expires? c.What is your net profit on the option if Walmart’s stock price increases to $ 80 at expiration of the option and the option holder exercises the option?

Answer 1

Answer:

a. $1.25 per contract

b. $1.25 per share

c. - $4.75 per share

Explanation:

a. If we compare the intrinsic value versus time value, the option premium would be the same i.e $1.25 per contract.

b. If the stock price decreases to $70 and it stays till the option expires, the net profit would be $1.25 per share because it is less than the exercise price.

c. If the stock price increase to $80 which is more than the exercise price.So, the net profit would be - $4.75 ($74 - $80 + $1.25).