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...

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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
Answered Same DayMay 03, 2021

Solution

Harshit Agarwal answered on May 04 2021
28 Votes

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