TUTORIAL – DERIVATIVES (OPTION)
Notes:
*1 lot = 100 shares
Call option:
i. Give a right to buy (but not obligation) an underlying asset (stock, currency,
commodities or financial asset) at a specified price within a specified time period.
ii. Best time to buy: When the price is expected to increase in future.
iii. Profit/loss : (Market Price – Strike Price) – Option Premium
(MP – SP) - OP
Put option:
i. Give a right to sell (but not obligation) an underlying asset (stock, currency,
commodities or financial asset) at a specified price within a specified time period.
ii. Best time to buy: When the price is expected to decrease in future.
iii. Profit/loss : (Strike Price - Market Price) – Option Premium
(SP – MP) - OP
Tutorial Questions
1. Define call option and when is the best time to buy call option and put option?
2. Khazanah’ shares are currently selling at RM 9.80 and Mr. Ali knows that the price of
Khazanah shares is expected to increase in three months’s time. As an opportunist, Mr
Ali is taking an option at a total premium of RM 100. The option enables him to buy
10 lots of Khazanah shares at the striking price of RM 11. Mr Ali exercise the option
at a price of RM 13 for 6 lots and RM 11.50 for 4 lots.
a) Identify the type of option that Mr Ali would purchase.
b) Compute the profit or loss from the option.
3. John expects that the price of stock will increase in the near future. Therefore, he
bought 200 units of BCD’s June RM40 option for RM2.00 per share. The current
price for this stock is RM 42. Give the following details of the option.
a) Types of option
b) Underlying assets
c) Strike price
d) Expiry date
e) Premium
f) Calculate the profit or loss if the holder exercised the option.
g) Would John exercise this option?
4. End of year 2022 is expected to recovery period of Malaysian’s share markets, the
market should be bullish soon. To bet this expectation, Mr Donald is taking a call
option to buy 20 lots of shares at total premium of RM 600. Currently the share is
trading around RM6.25 per share and it is predicted to increase by 30% at the end of
this year. The option will give the holder the right to buy the shares at RM 7.8 per
share.
a) Calculate the expected market price of share.
b) If the expectation is correct, calculate his profit or loss.
5. You bought 500 units of ABC’s June RM32 call option for RM2. The current price
for this stock is RM 38. Give the following details of the option:
i. Type of option
ii. Underlying asset
iii. Strike price
iv. Expiry date
v. Premium
vi. Calculate the realized profit if the holder exercised the option.
6. Mr. Zack is expecting that the market price of OTD shares will drop by 40% from its
current price of RM 5 in about 30 days time. Mr Zack decides to buy a 30 day option
for 2 lot at the premium RM 800. The striking price of the put is at RM5.
i. Type of option
ii. Would Mr. Zack exercise that option? If Mr Zack’s forecast was correct and
he exercise that option, how much profit or loss would he make?
7. Assume you are investor. You bought a call option at a premium of RM 1.2 per share.
You have a right to buy 10 lots of Maybank shares at RM 12. You have exercised the
option at a price of RM 14.50 for 7 lots and at RM 12.5 for 3 lots. Compute the profit
or loss from the option.