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Calculate Option Profit And Loss - Series 7

  1. An investor sells 1 PQR Sep 30 put for $1.50. If the market price of PQR is $32 at expiration, what is the result for the investor?
    Answer: $150 profit The writer of a put profits if the stock price is above the strike price at expiration. Since the market price of $32 is above the $30 strike price, the put option expires worthless. The investor's profit is the full premium received: $1.50 x 100 = $150.
  2. A speculator buys 3 XYZ Jul 200 calls at $8 when the market price of XYZ is $199. If the price of XYZ stock falls to $190 at expiration, what is the investor's total loss?
    Answer: $2,400 For a long call option, the maximum possible loss is the entire premium paid. This occurs if the option expires out-of-the-money (i.e., the market price is at or below the strike price). Since the stock price of $190 is below the $200 strike price, the calls expire worthless. The total loss is the premium per contract ($8 x 100 = $800) multiplied by the number of contracts (3). Total loss = $800 x 3 = $2,400.
  3. A trader establishes a bull put spread by writing 1 QRS Jan 110 put at $7 and buying 1 QRS Jan 100 put at $2. What is the breakeven point?
    Answer: $105 This is a put credit spread, resulting in a net credit of $7 - $2 = $5. For a bull put spread, the breakeven point is calculated by subtracting the net credit from the higher strike price (the short put). Breakeven = $110 - $5 = $105.
  4. An investor establishes a bull call spread by buying 1 JKL Sep 50 call for $5 and selling 1 JKL Sep 55 call for $2. If JKL stock is trading at $54 at expiration, what is the investor's total profit or loss?
    Answer: $100 profit First, calculate the net debit for the spread: $5 (paid) - $2 (received) = $3 net debit per share, or $300 total cost. At expiration with the stock at $54, the long 50 call is in-the-money by $4 ($54 - $50) and can be sold or exercised for a $400 gain. The short 55 call is out-of-the-money and expires worthless. The net profit is the gain from the long call minus the initial cost of the spread: $400 - $300 = $100 profit.
  5. A customer writes 1 naked MNO Jun 70 call for a premium of $2. At expiration, the market price of MNO is $78. What is the customer's gain or loss?
    Answer: $600 loss The writer of a naked call has an obligation to sell the stock at the strike price. The breakeven point is Strike Price + Premium = $70 + $2 = $72. Since the market price of $78 is above the breakeven, the writer has a loss. The loss is calculated as (Premium Received - (Market Price - Strike Price)) x 100. This is ($2 - ($78 - $70)) x 100 = ($2 - $8) x 100 = -$6 x 100 = $600 loss.
  6. A customer writes 1 DEF Oct 45 put for a premium of $3. If the stock price is $38 at expiration, what is the customer's gain or loss?
    Answer: $400 loss The breakeven for a short put is the strike price minus the premium: $45 - $3 = $42. Since the stock price of $38 is below the breakeven, the position is a loss. The put is in-the-money by $45 - $38 = $7. The writer's net loss is the $7 intrinsic value minus the $3 premium received: $7 - $3 = $4 per share. The total loss is $4 x 100 = $400.
  7. An investor expecting high volatility buys 1 STU Feb 90 call at $4 and 1 STU Feb 90 put at $3. This long straddle will be profitable if the stock price is either above $97 or below:
    Answer: $83 To find the breakeven points for a straddle, first calculate the total premium paid: $4 (call) + $3 (put) = $7. The upside breakeven is the strike price plus the total premium ($90 + $7 = $97). The downside breakeven is the strike price minus the total premium ($90 - $7 = $83). The position is profitable above $97 or below $83.
  8. An investor creates a bear call spread by selling 1 LMN Oct 40 call at $4 and buying 1 LMN Oct 45 call at $1. What is the maximum potential loss?
    Answer: $200 This is a credit spread because the premium received ($4) is greater than the premium paid ($1), resulting in a net credit of $3. The maximum loss for a credit spread is the difference in strike prices minus the net credit received. Max Loss = (($45 - $40) - ($4 - $1)) x 100 = ($5 - $3) x 100 = $200.
  9. A customer sells 1 UVW Jun 50 call at 22 and sells 1 UVW Jun 50 put at 2.502.50. What is the maximum potential gain on this short straddle position?
    Answer: $450 The maximum gain for a short straddle writer is the total premium received from selling both the call and the put. This gain is realized if the underlying stock price is exactly at the strike price at expiration, causing both options to expire worthless. Total Premium \= ($2 + $2.50) x 100 \= $450.
  10. An investor buys 200 shares of GHI at $72 per share and writes 2 GHI Dec 75 calls for a premium of $4 each. What is the breakeven point for the entire position on a per-share basis?
    Answer: $68 For a covered call position, the premium received from writing the call reduces the effective cost of the stock. The breakeven point is the stock's purchase price minus the premium received per share. Breakeven = $72 (Stock Cost) - $4 (Premium) = $68.
  11. An investor sells 1 ABC Mar 65 call at $2 and sells 1 ABC Mar 60 put at $3. This position is also known as a short combination. If ABC stock is trading at $62 at expiration, what is the investor's profit or loss?
    Answer: $500 profit At a market price of $62, the Mar 65 call is out-of-the-money and expires worthless. The investor keeps the $2 premium ($200). The Mar 60 put is also out-of-the-money and expires worthless. The investor keeps the $3 premium ($300). The total profit is the sum of the premiums received: $200 + $300 = $500. This represents the maximum gain for the position, which occurs when the stock price is between the two strike prices at expiration.
  12. A client anticipates a sharp decline in XYZ stock and buys 5 XYZ Apr 100 puts at $4 per contract. At expiration, XYZ is trading at $85. What is the total profit on the position?
    Answer: $5,500 The investor profits because the market price ($85) is below the strike price ($100). The profit per contract is calculated as (Strike Price - Market Price - Premium) x 100, which is ($100 - $85 - $4) = $11 per share, or $1,100 per contract. Since the client purchased 5 contracts, the total profit is $1,100 x 5 = $5,500.
  13. A customer establishes a bear put spread by buying 1 HJK Aug 80 put at $6 and selling 1 HJK Aug 70 put at $1. What is the breakeven point for this position?
    Answer: $75 This is a put debit spread. First, calculate the net debit: $6 (premium paid) - $1 (premium received) = $5 net debit. For a bear put spread, the breakeven point is found by subtracting the net debit from the higher strike price (the long put). Breakeven = $80 - $5 = $75.
  14. An investor purchases 100 shares of BCD at $98 and simultaneously buys 1 BCD Jul 95 put at $3 to protect the position. What is the investor's maximum possible loss?
    Answer: $600 This is a protective put strategy. The maximum loss is limited by the put option. The breakeven is Stock Cost + Put Premium = $98 + $3 = $101. The maximum loss occurs if the stock price drops below the put's strike price. It is calculated as (Stock Purchase Price - Put Strike Price) + Premium Paid. Here, ($98 - $95) + $3 = $6 per share. The total maximum loss is $6 x 100 = $600.
  15. A customer creates a bull call spread by buying 1 EFG May 60 call at $5 and selling 1 EFG May 65 call at $2. What is the maximum potential gain on this position?
    Answer: $200 This is a debit spread because the premium paid ($5) is greater than the premium received ($2), resulting in a net debit of $3. The maximum gain for a debit spread is the difference in strike prices minus the net debit. Max Gain = (($65 - $60) - ($5 - $2)) x 100 = ($5 - $3) x 100 = $200.
  16. A client buys 1 WXY Mar 85 put at a premium of $5. What is the breakeven point for this position?
    Answer: $80 The breakeven point for a long put option is calculated by subtracting the premium from the strike price. Therefore, the breakeven point is $85 (Strike Price) - $5 (Premium) = $80.
  17. An investor buys 100 shares of ZZZ at $45 per share and simultaneously writes 1 ZZZ Oct 50 call for a premium of $2. The stock is called away when the market price is $52. What is the investor's total profit?
    Answer: $700 In a covered call, the investor owns the underlying stock. When the stock is called away, the investor must sell their shares at the strike price. The profit is the capital gain on the stock (up to the strike price) plus the premium received. The capital gain is $50 (Strike Price) - $45 (Stock Cost) = $5 per share. The total profit is ($5 Capital Gain + $2 Premium) x 100 shares = $700.
  18. An investor purchases 10 TUV Dec 120 calls for a premium of $6.50 each. To break even, the market price of TUV stock must be:
    Answer: $126.50 The breakeven point for a long call option is calculated by adding the premium to the strike price. In this case, the breakeven point is $120 (Strike Price) + $6.50 (Premium) = $126.50.
  19. A client establishes a long straddle on WXY by purchasing a WXY Apr 75 call for $3 and a WXY Apr 75 put for $4. What are the breakeven points for this position?
    Answer: $68 and $82 First, find the total premium paid, which is $3 + $4 = $7. The breakeven points for a long straddle are found by adding and subtracting the total premium from the strike price. Upside breakeven: $75 + $7 = $82. Downside breakeven: $75 - $7 = $68.
  20. An investor purchases 1 ABC Jan 50 call at a premium of $3. At expiration, the market price of ABC stock is $60. What is the investor's total profit?
    Answer: $700 To calculate the profit on a long call, the formula is (Market Price - Strike Price - Premium) x 100. The call is exercised because the market price ($60) is above the strike price ($50). The calculation is ($60 - $50 - $3) x 100 = $7 x 100 = $700 profit.

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