Calculating Gains and Losses for a Financial Manager in Options Trading

What are the gains and losses of a financial manager if oil prices are $52, $55, $57, $59, and $62?

Let's analyze the financial manager's gains and losses in different scenarios based on the given data.

Gains and Losses:

Oil Prices Gains / Losses:

• $52: Loss on call options and gain on put options
• $55: Loss on call options and gain on put options
• $57: No gains or losses
• $59: Gain on call options and loss on put options
• $62: Gain on call options and loss on put options

Explanation:

A call option gives the holder the right, but not the obligation, to buy the underlying asset at a specified price, while a put option gives the holder the right, but not the obligation, to sell the underlying asset at a specified price.

In this case, the financial manager buys call options on 50,000 barrels of oil with an exercise price of $57 per barrel and simultaneously sells a put option on 50,000 barrels of oil with the same exercise price.

Let's break down the gains and losses for each scenario:

1. Oil Price is $52:

If the oil price is $52, the call option becomes worthless, resulting in a loss on the call option. The put option is exercised, leading to a gain on the put option.

Net Gains/Losses: $0

2. Oil Price is $55:

Similar to the $52 scenario, the call option is worthless, causing a loss on the call option. The put option remains unexercised, resulting in a gain on the put option.

Net Gains/Losses: $0

3. Oil Price is $57:

At an oil price of $57, there are no gains or losses for the financial manager as the market price equals the exercise price for both options.

Net Gains/Losses: $0

4. Oil Price is $59:

With the oil price at $59, the call option is exercised, leading to a gain on the call option. However, the put option remains unexercised, resulting in a loss on the put option.

Net Gains/Losses: $0

5. Oil Price is $62:

When the oil price reaches $62, the call option is exercised, resulting in a gain on the call option. Conversely, the put option becomes worthless, causing a loss on the put option.

Net Gains/Losses: $250,000

Overall, the gains and losses for the financial manager in these scenarios depend on the movement of oil prices and the corresponding outcomes of the call and put options.