share trade value in the ABC stock market

Week 10
Q2. The share trade value in the ABC stock market is 750 OMR. The share is now trading in the
sport market – put option with a strike price of 820 OMR and premium received of 85 OMR.You
are required to calculate:
a) The intrinsic value of the option
The intrinsic value = Strike price – share value
= 820 OMR – 750 OMR = 70 OMR
b) The time value of the options
Time value of the option = Premium received – intrinsic value
= 85 OMR – 70 OMR = 15 OMR
c) The time value to increase with no change in intrinsic value
= 15 OMR when the time value has no change
d) If the share price fell to 745 OMR on expiry date. What would be the profit/ loss
for the holder and writer of the option?
The intrinsic value = Strike price – share value
= 820 OMR – 745 OMR = 75 OMR
Time value of the options = Premium received – intrinsic value
= 85 OMR – 75 OMR = 10 OMR
Therefore, when the share price fell to 745 OMR, this would be profit for the
holder as in the money
e) The maximum loss or profit for the writer of the options
= the strike price – premium received
= 820 OMR – 85 OMR = 735 OMR
Based on the result, the share price fell to 745 OMR. The maximum profit for the put option is
735 OMR or 745 – 735 = 10 OMR as in the money. For the call option, the investors who is
buying the share at 745 OMR would be paid for 10 OMR with 745 OMR.
735 OMR + 10 OMR = 745 OMR
Holder Writer
Buyer
10 OMR