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Compute the gross profit and the net profit

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Reference no: EM132661441

Consider options on Stellar Corporation stock. There are call options and put options, both with a strike price of $10 and the expiration date of Jan. 16th. Currently the call premium is $0.50 and the put premium is $1.00. Suppose that there is a 50% chance that the stock price will be $11 on Jan. 16th (Scenario A) and another 50% chance that it will be $8 on Jan. 16th (Scenario B).

a. Compute the gross profit and the net profit of the call option and of the put option on Jan. 16th under Scenario A, only for the buyer.

b. Do the same under Scenario B.

c. Now consider the following portfolio: buying one share of the stock and buying a put option. Compute the value of the portfolio on Jan. 16th under each scenario.

Reference no: EM132661441

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