Question

Suppose that Apple’s current stock price is $120.56 and a call option with a 3-month maturity

on Apple stock and an exercise price of X = 130 currently sells for $7.00. Suppose that you

buy one call contract and hold it till expiration. Keeping in mind that a call contract is written

on 100 shares, determine the dollar payoffs, dollar and percentage profit/loss for this option

position for each of the following closing prices of Apple stock (ST) on option expiration day

a) ST= 120

b) ST= 130

c) ST= 145

Answer 1

Dollar payoffs of a call option is Maximum of {Apple stock (ST) on option expiration day - exercise price (X), 0}

And profit/loss = payoffs – price of call option

Call contract is written on 100 shares

a) ST= 120

Dollar payoffs of a call option = Maximum of {Apple stock (ST) on option expiration day - exercise price (X), 0}

= 100 * {120 – 130, 0} = 0

And profit/loss = payoffs – price of call option

= 0 – 100 *$ 7

= - $700

% loss = 100%

b) ST= 130

Dollar payoffs of a call option = Maximum of {Apple stock (ST) on option expiration day - exercise price (X), 0}

= 100 * {130 – 130, 0} = 0

And profit/loss = payoffs – price of call option

= 0 – 100 *$ 7

= - $700

% loss = 100%

c) ST= 145

Dollar payoffs of a call option = Maximum of {Apple stock (ST) on option expiration day - exercise price (X), 0}

= 100 * {145 – 130, 0} = $1500

And profit/loss = payoffs – price of call option

= $1500 – 100 *$ 7

= $800

% profit = $800/ $700 = 114.29%