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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

Acadia Pharma (ACAD)

$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?

b. What type of option is this? Explain your answer.

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?

b. What type of option is this? Explain your answer.

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

Acadia Pharma (ACAD)

$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

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

Acadia Pharma (ACAD)

$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?

b. What type of option is this? Explain your answer.

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?

b. What type of option is this? Explain your answer.

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

Acadia Pharma (ACAD)

$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

Answered Same DayMay 03, 2021

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