What Would It Cost To Open The Contract For The Lo Essay

1027 WordsJul 6, 20115 Pages
MBA ELECTIVE SUMMER 2011 If the option chain for Microsoft appears as follows: MSFT Oct 2011 $22.00 Call @ $2.55 1) What would it cost to open the contract for the Long and the Short Position? The Premium is the cost to open the contract. The long position pays the premium at the time the contract is opened. The short position receives the premium at the time the contract is opened. Another possible way to find the premium was to take the current stock price minus the strike price= June 15, 2011 MSFT current stock $23.07 - $22.00 = $1.97 2) If in August of 2011 MSFT was priced in the market at $24.26, what would the gain or loss be for the Long and Short positions? Market Call Strike Ex Date Premium $24.26 Long $22.00 Oct, 2011 $1.97 Aug, 2011 Long -$22.00 - $1.97 + $24.26 = $0.29 / Contract Gain Aug, 2011 Short $22.00 + $1.97 - $24.26 = -0.29/Contract Loss So, if MSFT is trading at $22, it would make sense to exercise the option to buy the shares at $22 and immediately sell them for $24.26. A call option contract with a strike price of $22 is being paid at 2.55. If the stock price rises and we paid 2.55 to purchase a single $22 MSFT call option covering 100 shares. Since the stock price went to $24.26 we can sell in the open market for this price. This gives us a profit of $2.26 per share. As each call option contract covers 100 shares, the total amount will be the difference $24.26 - $22.00 = $2.66 minus the premium, which leaves us with $0.29 or $29 gain per contract. 3) If in September of 2011 MSFT was price in the market at $20.80, what would the gain or loss be for the Long and Short positions? Market Call Strike Ex Date Premium $20.80 Long $22.00 Oct, 2011 $2.55 Sept, 2011 Long -$22.00 - $2.55 + $20.80 = -$3.75 / Contract Loss Sept, 2011 Short $22.00 + $2.55 - $20.80 = $3.75/Contract Gain If we

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