Question

Option Strike Price $	Call Option Price $	Put Option Price $
45	10.00	1.00
50	5.00	2.00
55	1.50	3.00
60	1.00	7.50

Using the quotes from the table above, an investor makes the following transactions:

(1) buys the stock at $55, and

(2) writes the December Call with a strike price of $55.

If the stock is selling for $62 per share, when the options expire, the profit from the trades is closest to a:
.

Multiple Choice

• $3.00 loss per share.

• $1.50 loss per share.

• $1.50 gain per share.

• $5.50 gain per share.

• $9.50 gain per share.

• $12.50 gain per share.

Answer 1

	Calculation of profit/loss from trade
a)	Buys the stock at $55
	Current selling price= $62
	Profit from stock= $(62-55)
			$7
b)	writes a december call with strike price of $55
	Here, he has sold the call option i.e. he will receive the premium amount and if the stock price goes above $55, call will be exercised against him and he will have to pay the difference
	Therefore,
	Payoff from call option= Strike price-current selling price of stock
			$(55-62)
			-$7.00
	Profit from call option= Payoff from option+Premium received
			$(-7+1.50)
			-$5.50
	* from the table we understood that with the strike price of $55, premium is $1.50
	Therefore,
	Profit on trade= Profit from stock+ Profit from call option= $(7-5.5)
			$1.50
	*since there is loss in profit from call, it is written in negative.
	Answer: $1.50 gain per share (Option C)