Time to expiration: T – t = 26/365 = 0.0712 (26 days between September 20 and October 16) — Repeat problem but close the position Use spreadsheet find profits for possible

Repeat problem 6, but close the position on September 20. Use the spreadsheet to find the profits for the possible stock prices on September 20. Generate a graph and use it to identify the approximate breakeven stock price?

SOLUTION

rc = 0.0571 = 0.21

Time to expiration: T – t = 26/365 = 0.0712 (26 days between September 20 and October 16)

Plugging into the Black-Scholes-Merton model, we obtain the option values on September 20 for stock prices of 150, 155, … , 180.

Spread value on 9/20 = Value of 170 call on 9/20 – Value of 165 call on 9/20

Π = 100(Spread Value on 9/20 – 6.00 + 8.10)

Option Value on 9/20

St October 165 October 170 Profit