question archive Question 8 In January 2021, Apple shares are priced at $320 a share
Question 8 In January 2021, Apple shares are priced at $320 a share
Subject:FinancePrice:2.86 Bought7
Question 8 In January 2021, Apple shares are priced at $320 a share. You believe that they are considerably overvalued and are worth only $200 a share. June 2021 put options on a strike price of $250 a share are currently valued at $10 per share. Each put contract is based on 100 shares. () What is the intrinsic value of the put option per share? (2 marks) (ii) What is the time value of the put option per share? (2 marks) (ii) If we arrive at expiry in June and you are proved correct with Apple shares are selling for $200, what is your net dollar profit on a single put option contract in dollars bearing in mind the contract is based on 100 shares? (2 marks) (iv) What is your net dollar profit (+) or loss (-) as a holder of the put contract (based on a contract size of 100 shares) if we arrive at expiry in June and you are wrong and Amazon shares are selling for $270? (4 marks)
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Strike price = 250 , put premium = 10 per share
1 contract = 100 shares, so total premium paid = 10 x 100 = 1000
(i) Intrinsic value of put option = Strike price - Current price = 250 - 300 = 0
As answer is negative, intrinsic value = 0
(ii) Time value of put option = Premium - Intrinsic value - = 10 - 0 = 10
Now if on expiry , stock price = 200
Payoff on put = Strike price - price on expiry = 250 - 200 = 50
Total payoff = 50 x 100 = 5000
(iii) Profit on put = Total payoff - premium = 5000 - 1000 = + 4000
so there is a profit of 4000
Now if on expiry , stock price = 270
Payoff on put = Strike price - price on expiry = 250 - 270 = 0 [ As answer is negative]
Total payoff = 0
(iv) Profit on put = Total payoff - premium = 0 - 1000 = - 1000
so there is a loss of 1000
