Question

You purchase 17 call option contracts with a strike price of $95 and a premium of $3.75. Assume the stock price at expiration is $102.46.

a. What is your dollar profit? (Do not round intermediate calculations.)

b. What is your dollar profit if the stock price is $88.41?

Answer 1

a.
Call option gives the purchaser of option the right to purchase the stock but not the obligation to purchase it.
Purchaser of call option would purchase the shares under the option if the share price of the stock at maturity of option is higher than the strike price.
In this case the stock price at expiration is $102.46 which is higher than strike price of $95 and thus option holder would exercise the option
Calculation of dollar profit
Dollar profit	Profit from exercising option - Premium paid on option
Dollar profit	((102.46-95)*17*100) - (3.75*17*100)
Dollar profit	12682 - 6375
Dollar profit	$6,307
Thus, dollar profit in this case is $6,307.
b.
If stock price is $88.41 which is lower than strike price than option holder would not exercise the option and thus there would be loss of premium paid
The option would be worthless and there would be dollar loss of $6,375 which is premium paid (3.75*17*100)
Dollar loss	$6,375