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 on this stock with a strike price of $30 and an option price of $1.60. You also purchase a two-month European put option on the stock with a strike price of $30 and an option price of $.20. Contracts are on 100 shares. What will be your net profit or loss on these option positions if the stock price is $36 on the day the options expire? Ignore trading costs and taxes.$600$420$210$270$400

Answer 1

Answer:

$420

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

= (($36 - $30) - $1.60) × 100 Shares

= $440

Net Loss from put option is

= (Option Premium paid) × Size of the Contract

= $0.20 × 100 Share

= $20

So, the net profit is  

= Net Profit from Call Option - Net loss from Put Option

= $440 - $20

= $420