Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition
V. Risk and Return 14. Options and Corporate
Finance© The McGraw−Hill^485
Companies, 2002Net Profit Net Profit
Ending Stock Option Value or Loss Stock Value or Loss
Price (50 contracts) (50 contracts) (929.37 shares) (929.37 shares)
$10 $ 0 $ 30,000 $ 9,294 $20,706
20 0 30,000 18,587 11,413
30 0 30,000 27,881 2,119
40 50,000 20,000 37,175 7,175
50 100,000 70,000 46,468 16,468
60 150,000 120,000 55,762 25,762CHAPTER 14 Options and Corporate Finance 457How do you find option prices for options that are currently traded? To
find out, we went to finance.yahoo.com,got a stock quote for J.C. Penney
(JCP), and followed the “Options” link. As you can see below, there were
five option contracts trading for J.C. Penney with a September 2001 expiration
date. The strike prices were $20, $22.50, $25, $30, and $35. Notice how compli-
cated the tickers are. To see how they are formed, follow the “Symbology” link.The Chicago Board Options Exchange (CBOE) sets the strike prices for these traded
options. The strike prices are centered around the current stock price, and the num-
ber of strike prices depends in part on the trading volume in the stock. If you exam-
ine the prices for the put options, you see the quotes are as expected. As the strike
price of the put option increases, the option contract becomes more valuable. Ex-
amining the call option prices, we see that three of the contracts with different strike
prices traded at the same price. How is this possible? There are two reasons. First, as
you have already noticed, the option contracts for J.C. Penney are not very actively
traded, at least during this period. The prices for the $22.50, $25, and $30 strike
price call options never existed at the same point in time. Most likely, the $30 strike
price call option was sold for $0.25, the stock price dropped and the $25 strike price
call was traded at $0.25, and no more trades were made on options at the $30 strike
price. If you look at the volume column, you will see that only 10 contracts had
traded up to this point on this day. Second, options traded on the exchange have a
5-cent “tick.” This means that any change in price is a minimum of 5 cents. So, while
you can price an option to the penny, you just can’t trade on the “Penney.”Work the Web