Question

the market price of northern mills stock has been relatively volatile and you think this volatility will continue for a couple more months. thus, you decide to purchase a two-month european call option contract on this stock with a strike price of $42 and an option price of $2.60. you also purchase a two-month european put option contract on the stock with a strike price of $42 and an option price of $1.20. what will be your net profit or loss on these option positions if the stock price is $47 on the day the options expire? ignore trading costs and taxes.

Answer 1

The  answer is $120.

Explanation: The computation of the net profit or loss is shown below: Before that we have to determine the following calculations

Net Profit from call option is = (Gain from Exercising Call Option - Option Premium paid) × Size of the Contract

= (($47 - $42) - $2.60) × 100 Shares

= $240

Net Loss from put option is

= (Option Premium paid) × Size of the Contract

= $1.20 × 100 Share

= $120

So, the net profit is  = Net Profit from Call Option - Net loss from Put Option= $240 - $120

= $120

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