Question 21.4: Assume you decided to purchase the September 275 through 290...
Assume you decided to purchase the September 275 through 290 put options quoted in Table 21.2 on August 21, 2013, and you financed each position by borrowing at 3% for 31 days. Plot the profit of each position as a function of the stock price on expiration.
TABLE 21.2 Option Quotes for Amazon.com Stock
The description of each traded option can be read as: year and month of expiration, followed by the strike price, followed by an identifier for the particular option series in parentheses. For example, the first call listed expires in September 2013 and has an exercise price of 265.00.
AMZN (AMAZON.COM INC) 284.57 -2.52
Aug 21 2013 @ 16:21 ET
| Calls | Last Sale | Net | Bid | Ask | Vol | Open Int | Puts | Last Sale | Net | Bid | Ask | Vol | Open Int |
| 13 Sep 265.00 | 0.00 | 0.00 | 19.80 | 21.10 | 0 | 0 | 13 Sep 265.00 | 0.72 | -0.50 | 0.72 | 0.85 | 1 | 115 |
| 13 Sep 270.00 | 17.10 | -1.00 | 15.20 | 16.45 | 3 | 5 | 13 Sep 270.00 | 1.13 | +0.18 | 1.22 | 1.40 | 10 | 132 |
| 13 Sep 275.00 | 14.25 | 0.00 | 11.70 | 12.20 | 0 | 26 | 13 Sep 275.00 | 1.93 | +0.17 | 2.05 | 2.29 | 31 | 116 |
| 13 Sep 280.00 | 8.81 | -2.74 | 8.15 | 8.65 | 6 | 56 | 13 Sep 280.00 | 2.96 | +0.35 | 3.35 | 3.70 | 1 | 163 |
| 13 Sep 285.00 | 6.35 | -0.25 | 5.25 | 5.70 | 147 | 158 | 13 Sep 285.00 | 4.75 | +0.20 | 5.45 | 5.75 | 21 | 212 |
| 13 Sep 290.00 | 3.30 | -2.00 | 3.10 | 3.45 | 3 | 144 | 13 Sep 290.00 | 7.10 | +0.70 | 8.25 | 8.65 | 40 | 171 |
| 13 Sep 295.00 | 2.19 | -0.81 | 1.72 | 1.89 | 24 | 233 | 13 Sep 295.00 | 10.00 | 0.0 | 11.80 | 12.20 | 0 | 111 |
| 13 Sep 300.00 | 1.00 | -0.43 | 0.89 | 1.07 | 12 | 334 | 13 Sep 300.00 | 15.30 | 0.0 | 15.75 | 16.55 | 0 | 316 |
| 13 Sep 305.00 | 0.50 | -0.34 | 0.50 | 0.59 | 25 | 229 | 13 Sep 305.00 | 11.80 | 0.0 | 18.50 | 21.50 | 0 | 54 |
PLAN
Suppose P is the price of each put option on August 21. Then your cash flows on the expiration date will be:
(Strike Price – Stock Price) – P \times 1.03^{31/365} , if Stock Price < Strike Price
or 0 – \times 1.03^{31/365} , if Stock Price ≥ Strike Price
EXECUTE
The graph plots your profits:
EVALUATE
The graph illustrates the same tradeoff between the maximum loss and the potential for profit as for the call options in Figure 21.3. The greatest profit potential comes from the most expensive option, so if that option expires worthless, you have lost the greatest amount.
