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MGMT E-2000
Fall, 2013
Problem Set 6
(Due Tuesday, November 26)
1.
Say that on a recent day, Wal Mart stock closed at $55.19 per share, down $.05 on the day.
Consider the following chart giving the premium as of close of trading on that day, on various options on Wal Mart stock:
|
WMT (WAL MART STORES INC) 55.19 -0.05 Calls Last Sale Net Bid Ask Vol Open Int Puts Last Sale Net Bid Ask Vol Open Int 13 Dec 42.50 (WMT LV-E) 12.30
0.0 12.65 13.05
0 28 13 Dec 42.50 (WMT XV-E)
0.02 0.0 0.0 0.02 0 3194 13 Dec 45.00 (WMT LI-E) 10.15 0.0 10.15 10.60 0 224 13 Dec 45.00 (WMT XI-E) 0.02 0.0 0.0 0.02 45 14141 13 Dec 47.50 (WMT LW-E) 7.56 0.0 7.70 8.10 0 611 13 Dec 47.50 (WMT XW-E) 0.01 -0.03 0.0 0.03 42 16007 13 Dec 50.00 (WMT LJ-E) 5.80 0.0 5.25 5.35 290 5611 13 Dec 50.00 (WMT XJ-E) 0.02 -0.02 0.02 0.03 112 66726 13 Dec 52.50 (WMT LX-E) 3.33 -0.02 2.83 2.89 182 15093 12 Dec 52.50 (WMT XX-E) 0.08 -0.07 0.08 0.11 386 20154 13 Dec 55.00 (WMT LK-E) 0.92 -0.32 0.85 0.89 1672 34325 13 Dec 55.00 (WMT XK-E) 0.59 -0.01 0.58 0.62 2663 27823 13 Dec 57.50 (WMT LY-E) 0.20 -0.08 0.12 0.14 2220 20681 13 Dec 57.50 (WMT XY-E) 1.85 -0.41 2.33 2.38 365 10451 13 Dec 60.00 (WMT LL-E) 0.03 -0.01 0.01 0.04 114 35895 13 Dec 60.00 (WMT XL-E) 4.70 -0.15 4.70 4.80 30 6125 13 Dec 62.50 (WMT LA-E) 0.01 0.0 0.0 0.03 0 20656 13 Dec 62.50 (WMT XA-E) 7.55 0.0 7.05 7.35 0 4134 13 Dec 65.00 (WMT LM-E) 0.02 0.0 0.0 0.02 0 19428 13 Dec 65.00 (WMT XM-E) 10.43 0.0 9.40 9.85 0 2743 13 Dec 67.50 (WMT LR-E) 0.01 0.0 0.0 0.02 0 4278 13 Dec 67.50 (WMT XR-E) 10.60 0.0 11.90 12.40 0 763 13 Dec 70.00 (WMT LN-E) 0.02 0.0 0.0 0.02 0 4431 13 Dec 70.00 (WMT XN-E) 13.40 0.0 14.40 14.85 0 510 13 Dec 75.00 (WMT LO-E) 0.01 0.0 0.0 0.01 0 1057 13 Dec 75.00 (WMT XO-E) 19.50 +0.25 19.40 19.95 10 20 14 Jan 42.50 (WMT AV-E) 12.82 0.0 13.00 13.15 0 215 14 Jan 42.50 (WMT MV-E) 0.27 -0.11 0.28 0.30 219 3497 14 Jan 45.00 (WMT AI-E) 10.75 +0.45 10.65 10.80 55 41905 14 Jan 45.00 (WMT MI-E) 0.48 -0.01 0.42 0.45 140 68355 14 Jan 47.50 (WMT AW-E) 8.82 +1.02 8.40 8.55 1 4946 14 Jan 47.50 (WMT MW-E) 0.61 -0.09 0.67 0.70 179 31750 14 Jan 50.00 (WMT AJ-E) 6.60 -0.20 6.30 6.40 44 68621 14 Jan 50.00 (WMT MJ-E) 1.05 -0.04 1.06 1.09 210 119331 14 Jan 52.50 (WMT AX-E) 4.80 -0.15 4.45 4.55 121 3230 14 Jan 52.50 (WMT MX-E) 1.53 -0.18 1.67 1.72 78 3527 14 Jan 55.00 (WMT AK-E) 2.96 -0.34 2.88 2.94 535 49005 14 Jan 55.00 (WMT MK-E) 2.51 -0.06 2.60 2.65 306 49303 14 Jan 57.50 (WMT AY-E) 1.84 -0.12 1.68 1.73 192 4390 14 Jan 57.50 (WMT MY-E) 3.85 -0.05 3.85 4.00 80 1174 14 Jan 60.00 (WMT AL-E) 0.96 -0.04 0.88 0.92 495 67068 14 Jan 60.00 (WMT ML-E) 5.90 0.0 5.55 5.70 0 67158 14 Jan 62.50 (WMT AA-E) 0.44 -0.07 0.40 0.44 432 3725 14 Jan 62.50 (WMT MA-E) 7.60 -1.35 7.60 7.70 10 244 14 Jan 65.00 (WMT AM-E) 0.18 -0.03 0.18 0.21 64 82933 14 Jan 65.00 (WMT MM-E) 9.30 -1.33 9.85 10.00 5 17887 14 Jan 70.00 (WMT AN-E) 0.04 -0.01 0.03 0.06 150 44079 14 Jan 70.00 (WMT MN-E) 15.75 0.0 14.70 14.85 0 1319 14 Jan 75.00 (WMT AO-E) 0.01 -0.02 0.01 0.03 10 3546 14 Jan 75.00 (WMT MO-E) 20.50 0.0 19.35 19.95 0 259 |
In the questions that follow, use the “Last Sale” column to answer questions which involve option pricing.
a. What was the premium on the Jan. ‘14 WMT 47.50 call, i.e., the Wal Mart call which expires in Jan. ‘14 and has a strike price of $47.50?
b.
How much would an investor who wanted to buy 1 contract of this option have had to spend?
b. What is the formula for the intrinsic value of a call? What was the intrinsic value of the Dec. ‘13 WMT 50 call? Was this option “in the money” or “out of the money”? What was the time value of this option?
Formula for intrinsic value of call –
d.
Was the Jan. ‘14 WMT 60 call in or out of the money? What was the intrinsic value of this option? What was the time value of this option?
e.
What was the premium on the Jan.‘14 WMT 60 put? Was this option in or out of the money? What was the intrinsic value of this put? What is the time value?
f.
What was the intrinsic value of the Dec.’13 WMT 50 put? Was this option in or out of the money? What was the option’s time value?
2.
ErenCo is an up-and-coming stone quarry company. A recent report, reflecting the general sentiment of all market participants, projected the following prices and probabilities for ErenCo stock on Feb. 21, 2014:
Probability
1/3
1/2
1/6
Stock Price
$15
$10
$6
a.
According to the EMH, what would you expect the market price of ErenCo stock to be today? Why?
b.
Nancy, an investor in ErenCo, decides to buy a put option on ErenCo stock with a strike price (exercise price) of $9 which expires on the third Friday of February, 2014. What would she have to pay in today’s market for this option? In general, what determines the price an investor will have to pay for an option?
