Question

General Motors purchased a speculative Call on Household Manufacturing common stock on March 18, 2010, for $11,692. The Call is on 800 shares at a strike price of $683. It expires on September 30, 2010. The following data is available with respect to the Call:
Date	Market Price of Household Manufacturing Shares	Time Value of Household Manufacturing Option
March 18, 2010	683	11,692
March 31, 2010	761	10,917
June 30, 2010	755	5,488
September 30, 2010	631	-
What is the amount of the net income (realized and/or unrealized) recorded on the income statement for all periods as of June 30, 2010 on the Call?

*Please show steps*

Answer 1

On March 31st, 2010, the call is in the money and hence value of call = Time value + Intrinsic value.

On March 28th, 2010 when the call was bought, it was at the money since current market of price of underlying and strike was same = 683. Hence , it had only time value and no intrinsic value.

The profit on the call = Time value of call + Intrinsic value at March 31st - Time value of call on March 28th.

(Value of call = Time value + Intrinsic value)

When option is out of money or at the money , the value of option = time value and Intrinsic value is zero.

Only when option is in the money, its value = time value + Intrinsic value.

Intrinsic value of call on March 31st = (761- 683) *800 = $62,400

The profit on the call = 10917 +62400 - 11692 = $61,625

So, Unrealized net income as of March 31st, 2010 = $61,625

and Unrealized net income on March 28th, 2010 = 0 since at start of trade, position is in no loss & no profit.

Intrinsic value of call on June 30th = (755-683)*800 = $57,600

Value of profit of call on June 30th, 2010 = Time value of call + Intrinsic value at June 30th  - Time value of call on March 28th.

= 5488 + 57600 - 11692 = $51,396

So, Unrealized net income as of June 30th, 2010 = $51,396