Suppose you bought an October call option on Amazon that had a strike price of $20 with a premium of $2.

Suppose you bought an October call option on Amazon that had a strike price of $20 with a premium of $2. At the same time, you shorted Amazon stock at today’s price of $15. If the price of amazon appreciates to $26 in October, what is your total profit?

$15
$3
$0
$-4
$-7

Expert Solution

He shorted/sold the amazon stock today @ $ 15

right to buy option/call option gives him the share in october @ $ 20

spot price of amazon stock in october = $ 26

premium on call option = $ 2

he will have to purchase the amazon stock to fullfill his short selling in october. he will purchase the amazon stock to exercise his call option @ $ 20 as market price is $ 26 which is higher than its exercise price.

so profit/-loss = short selling stock - exercise price - premium on call option

= 15 - 20 - 2

= 15 - 22

= $ -7

option (e) should be the right answer.

jeff jeffy answered 2 years ago

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