Question

CPT is currently trading at $95/share. You bought 3 CALL-option contracts on CPT with a strike price of $90 for $8 each.

a. What will be your total $ and % gain/loss if CPT price is $95 at the expiration date?

b. What will be your total $ and % gain/loss if CPT price is $90 at the expiration date?

c. What will be your total $ and % gain/loss if CPT price is $85 at the expiration date?

Answer 1

a. Profit or loss is computed as shown below:

= (Price on expiration date - strike price - premium) x 3 x 100

= ($ 95 - $ 90 - $ 8) x 300

= - $ 900

% loss is computed as follows:

= Loss / Premium

= $ 900 / (3 x 100 x 8)

= $ 900 / $ 2,400

= 37.5% Loss

b. Profit or loss is computed as shown below:

= (Price on expiration date - strike price - premium) x 3 x 100

= ($ 90 - $ 90 - $ 8) x 300

= - $ 2,400

% loss is computed as follows:

= Loss / Premium

= $ 2,400 / (3 x 100 x 8)

= $ 2,400 / $ 2,400

= 100% Loss

c. Profit or loss is computed as shown below:

= (Price on expiration date - strike price - premium) x 3 x 100

= ($ 85 - $ 90 - $ 8) x 300

= - $ 3,900

But the maximum loss in case of a buying a call option is restricted to the amount of premium paid which in this case is:

= $ 8 x 300

= - $ 2,400

% loss is computed as follows:

= Loss / Premium

= $ 2,400 / (3 x 100 x 8)

= $ 2,400 / $ 2,400

= 100% Loss

Feel free to ask in case of any query relating to this question