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 Acadia Pharma (ACAD) $26.80 18 Apr 2019 25 call 53.2 Nee NFLX) $160.31 17 May 2019 786 55.85 & Gamblea 598.975 A 2019 95 cali SUS NG S138.125 Apr 2019 137 2:19 Pure Storage Inc. (PSG) $20.5017 May 2019 223 cal Se Sealer Inc 549820 Dec 2019 50 call 527 Scaler, Inc 25 548.68 20 Dec 2019 50 put $2.50 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 S.75? What would the price of the option be if the underlying decreases by S. 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 S.75? What would the price of the option be if the underlying decreases by S.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 deepest . CP-75 DCI 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. NERVING UNDERLYIN STRIKE OPTIONS G TYPE PRICE PRICE SPY $278.63 280 call $11.70 SPY $275,65 280 call 514.68 SPY $278.68 230 put $12.39 SPY 290 call 537.44 SPY 20 pul 8.3 SPY 280 SPY $278.68 54.14 A B C D E F 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. A SPY B SPY CSPY D SPY E SPY F SPY SPY $278.65 280 call $1.00 -07 $278.68 280 call $14.6902 5278.65 280 put $12.39-03 $278.68 280 call $27.44-03 $278.65 280 put $73.04 $278.68 280 put $14.03.03 $278.68 280 call 54.14 - 04 8. Gamma: Look at the following chart. Based only on this information, which underlying equity is the riskiest (highest 1)? PRETRE A $139.20 139 call .SI .09 B $137.47 137 call 54 C$137.75 138 put 500 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. A $138.35 call .13 B $138.35 call 6 C $138.38 put 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 S.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 it 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. A $138.35 call B $138.35 call 06 CSI3835 put. D $138.33 put 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 400 Acadia Pharma (ACAD) $26.60 18 Apr 2019 25 call $3.70 65 30 Netflix Inc. (NFLX) $357.32 17 May 2019 380 put $36.95 -60 100 Proctor & Gamble Co. (PG) $98.44 5 Apr 2019 95 call $4.35.75 75 IBM (IBM) $139.20 5 Apr 2019 137 put $4.30 500 Pure Storage Inc. (PSTG) $20.86 17 May 2019 22.5 call $.95 165 ZScaler, Inc (ZS) $60.80 20 Dec 2019 50 call $17.70 .75 DELTA .61 .38
