Suppose you own 200 shares in AAPL and would like to protect your position from an unexpected drop in stock price. The prudent way to protect yourself would be to:   buy a call option short the stock c.   buy a put option

Stock options are one of the riskiest and potentially lucrative financial instruments available to investors. Stock options give the investor the right to buy or sell a particular stock for a stated price within a specified period of time. For example, on December 20th, an investor who believed that the stock of Apple Computer, Inc. was underpriced at $171.54, could buy an option to purchase 100 shares of Apple for $176.00 per share at any time until December 31st. The price of the option was $2.60 per share. Assume the investor purchased the option for $260.00 and Apple stock rose to $179.85 on Dec 23rd. Further, assume the investor exercised the option and bought the stock for $176.00 per share on Dec 23rd and immediately sold the stock for $179.85 per share. What rate of return did the investor make in 3 days from Dec 20th to the 23rd? (Round the final answer to two decimal places.) The rate of return is _________%.

There are various ways to calculate the price of a call option using the Black-Scholes model. Below is a spreadsheet that breaks the required formulas into pieces to make it easy to work with. Column (1) shows the various inputs. The first five cells are the required inputs for a non-dividend paying stock. The remainder of the cells are the formula parts. Column (2) shows a solved problem for a stock selling for $50, with an exercise price of $45, an interest rate of 6 percent, 90 days (one-quarter of a year), and a standard deviation of .235. Column (3) shows how the cell values in Column (2) were calculated. Once you have this set up in the spreadsheet, you can calculate the price of any call option by substituting the correct values in the first five cells of column (2). Spreadsheet begins in row 2. Calculating a Call Price Using the Black-Scholes Model S 50 45 R 0.06 T 0.25 S 0.235 In(S/X) 0.105361 LN(B2/B3) r+0.50? 0.087613 B4+(,5)*(B6)^2 o(t)½ 0.1175 В6*((B5)^0.5) dl 1.083095…

2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The following table presents the data on ABC Corp.'s call options at different stock prices. Based on your understanding of exercise value and option prices, complete the table with a strike price of $24.00: Stock Price ($) 16.00 32.00 40.00 44.00 48.00 Strike Price ($) 24.00 24.00 24.00 24.00 24.00 Exercise Value ($) Market Price of Option ($) 1.56 10.10 0.00 20.00 18.40 22.60 28.00 Time Value ($) 2.10 2.40 4.00 After two weeks, the stock price of ABC Corp. increases to…

Question III: In the following, suppose that neither stock pays a dividend. (a) Suppose you have a call option that permits you to receive one share of Apple by giving up one share of AOL. In what circumstance might you early-exercise this call? (b) Suppose you have a put option that permits you to give up one share of Apple, receiving one share of AOL. In what circumstance might you early-exercise this put? Would there be a loss from not early-exercising if Apple had a zero stock price? (c) Now suppose that Apple is expected to pay a dividend. Which of the above answers will change? Why?

The purpose of a lockup provision is to:   Question 22 options:   keep individual investors from buying and selling stock.   prevent downward pressure on the stock's price.   increase the number of outstanding shares.   allocate a larger proportion of stock to institutional investors.

You hold a portfolio of an asset-or-nothing call and a cash-or-nothing put option written on a stock that does not pay dividends. The strike price of the options is the same. The payout of the cash-or- nothing option if it is exercised equals the strike price. Your portfolio is equivalent to O A plain-vanilla call option. O None of the other answers are correct. O A covered call position, i.e., a long stock + short plain vanilla call. O A plain-vanilla put option. O A protective put position, i.e., a long stock + long put option.

Which of the following is TRUE? An American call option on a stock should never be exercised early O An American call option on a stock should not be exercised early when no dividends are expected O It can be optimal to exercise early an American call option on a stock when no dividends are expected and there is no liquidity or portfolio rebalancing need. O An American call option on a stock should be exercised early when no dividends are expected

The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock’s price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or “issue” new options, which is called writing options. Based on your understanding of exercise value and option prices, complete the table with a strike price of $30.00: Stock Price ($) Strike Price ($) Exercise Value ($) Market Price of Option ($) Time Value ($) 20.00 30.00 0.00 1.56      40.00 30.00      12.10 2.10 50.00 30.00      22.40 2.40 55.00 30.00 25.00 27.60      60.00 30.00      34.00 4.00   After two weeks, the stock price of ABC Corp. increases to $62.40. Suppose you purchased the shares for $40.00 and then sell…

Let's say I decide to sell 1 call option through an account, but this account will only let me do this if you I already own the stock (a “covered call”), so I buy 500 shares of Company A and then proceed to sell a call option on Company Say this short call option expires in-the-money. What does in-the-money mean in this context? What will I have to do as the seller of this call option if the option expires in-the-money? And what about if it expires out-of-the-money?