# OPTIONS – PROBLEMS TO BUILD CONCEPT UNDERSTANDING 1. Option Function: a. What happens if a long call is exercised? Explain. b. What happens if a long put is exercised? Explain. c. What happens if a...

OPTIONS – PROBLEMS TO BUILD CONCEPT UNDERSTANDING
1. Option Function:
a. What happens if a long call is exercised? Explain.
b. What happens if a long put is exercised? Explain.
c. What happens if a short call is exercised? Explain.
d. What happens if a short put is exercised? Explain.
2. Intrinsic and Extrinsic Value:
Look at the following table and compute intrinsic and extrinsic values:
UNDERLYING
PRICE
OPTION
PRICE
INTRINSIC VALUE
EXTRINSIC VALUE
\$26.80
18 Apr XXXXXXXXXXcall
\$3.20

Netflix Inc. (NFLX)
\$360.31
17 May XXXXXXXXXXput
\$35.85

Proctor & Gamble Co. (PG)
\$98.97
5 Apr XXXXXXXXXXcall
\$4.85

IBM (IBM)
\$138.12
5 Apr XXXXXXXXXXput
\$2.19

Pure Storage Inc. (PSTG)
\$20.50
17 May XXXXXXXXXXcall
\$1.05

ZScaler, Inc (ZS)
\$49.68
20 Dec XXXXXXXXXXcall
\$9.70

ZScaler, Inc (ZS)
\$49.68
20 Dec XXXXXXXXXXput
\$9.80

3.1 Delta:
a. An option is trading at \$3.45. If it has a delta of .78, what would the price of the option be if the underlying increases by \$.75? What would the price of the option be if the underlying decreases by \$.55?
c. With a delta of .78, is this option ITM, ATM or OTM? Explain your answer.
3.2 Delta:
a. An option is trading at \$5.03. If it has a delta of -.56, what would the price of the option be if the underlying increases by \$.75? What would the price of the option be if the underlying decreases by \$.55?
c. With a delta of -.56, is this option ITM, ATM or OTM? Explain your answer.
3.3 Delta: Look at the following chart. Rank the options in terms of moneyness, from deepest ITM to XXXXXXXXXXdeepest OTM.

Option Type
Delta
A
Call
.89
B
Call
.12
C
Put
-.75
D
Call
.16
E
Call
.35
F
Put
-.50
4. Extrinsic Value: Look at the following chart. Rank the options in order of expiry, from nearest to farthest.

UNDERLYING
UNDERLYING
PRICE
STRIKE/TYPE
OPTION PRICE
INTRINSIC VALUE
EXTRINSIC VALUE
A
SPY
\$278.68
280 call
\$11.70

B
SPY
\$278.68
280 call
\$14.69

C
SPY
\$278.68
280 put
\$12.39

D
SPY
\$278.68
280 call
\$27.44

E
SPY
\$278.68
280 put
\$8.73

F
SPY
\$278.68
280 put
\$14.83

G
SPY
\$278.68
280 call
\$4.14

5. Theta:An option has a theta of -.08. If it has a price of \$2.58 today, what will its price be tomorrow, all else being the same? Explain.
6. Theta: Option A has a theta of -.10 and Option B has a theta of -.05. Which option is expiring first? Explain.
7. Theta: Look at the following chart. Rank the options in order of expiry, from nearest to farthest.

UNDERLYING
UNDERLYING
PRICE
STRIKE/
TYPE
OPTION PRICE
THETA
A
SPY
\$278.68
280 call
\$1.00
-.07
B
SPY
\$278.68
280 call
\$14.69
-.02
C
SPY
\$278.68
280 put
\$12.39
-.03
D
SPY
\$278.68
280 call
\$27.44
-.02
E
SPY
\$278.68
280 put
\$8.73
-.04
F
SPY
\$278.68
280 put
\$14.83
-.03
G
SPY
\$278.68
280 call
\$4.14
-.04
8. Gamma: Look at the following chart. Based only on this information, which underlying equity is the riskiest (highest 2)?

UNDERLYING
PRICE
STRIKE/
TYPE
OPTION DELTA
OPTION GAMMA
A
\$139.20
139 call
.51
.09
B
\$137.47
137 call
.54
.06
C
\$137.75
138 put
-.50
.06
D
\$138.35
138 call
.54
.10
9. Gamma: Look at the following chart. Based only on this information, rank the options in terms of moneyness, from deepest ITM to deepest OTM.

UNDERLYING
PRICE
TYPE
OPTION GAMMA
A
\$138.35
call
.13
B
\$138.35
call
.06
C
\$138.35
put
.08
D
\$138.35
put
.10
10. Gamma: An option is trading at \$5.26, has a delta of .52, and a gamma of .11. what would the delta of the option be if the underlying increases by \$.75? What would the delta of the option be if the underlying decreases by \$1.05? Explain.
11. Vega: An option is priced at \$3.20 and has a vega of .10. If the implied volatility of the option is 25%, what would the option price be if the volatility of the underlying increases by 1%?
12. Vega: A stock is about to announce earnings, and the option has begun to increase in price, even though the underlying price hasn’t changed. Why is this happening?
13. Vega: Look at the following chart. Based only on this information, rank the options in terms of moneyness, from deepest ITM to deepest OTM.

UNDERLYING
PRICE
TYPE
OPTION VEGA
A
\$138.35
call
.13
B
\$138.35
call
.06
C
\$138.35
put
-.08
D
\$138.35
put
-.10
14. Delta Neutrality: Based on the stock portfolio below, use options to build a delta neutral portfolio, keeping the long equity positions as is. NOTE: If an option is a short call or a long put, be sure to remember that these positions have negative delta.

UNDERLYING
PRICE
OPTION
PRICE
OPTION DELTA
400
\$26.60
18 Apr XXXXXXXXXXcall
\$3.70
.65
30
Netflix Inc. (NFLX)
\$357.32
17 May XXXXXXXXXXput
\$36.95
-.60
100
Proctor & Gamble Co. (PG)
\$98.44
5 Apr XXXXXXXXXXcall
\$4.35
.75
75
IBM (IBM)
\$139.20
5 Apr XXXXXXXXXXput
\$4.30
.61
500
Pure Storage Inc. (PSTG)
\$20.86
17 May XXXXXXXXXXcall
\$.95
.38
165
ZScaler, Inc (ZS)
\$60.80
20 Dec XXXXXXXXXXcall
\$17.70
.75