Question

You purchase 18 call option contracts with a strike price of $100 and a premium of $2.85. Assume the stock price at expiration is $112.00.

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

b. What is your dollar profit if the stock price is $97.95? (A negative value should be indicated by a minus sign. Do not round intermediate calculations.)

Answer 1

(a) Value of call option at expiry = max (0, spot at expiry - strike price)

Value of call option at expiry = max (0, 112 - 100) = max (0,12) = 12

Profit per option = value of option at expiry - premium paid

Profit per option = 12 - 2.85 = $9.15

Dollar profit = profit per option x number of options

Dollar profit = 9.15 x 1800 = $ 16,470

(Note that if nothing is mentioned, each option contract is assumed to be of 100 options)

(b) Value of call option at expiry = max (0, spot at expiry - strike price)

Value of call option at expiry = max (0, 97.95 - 100) = max (0,-2.05) = 0

Profit / (Loss) per option = value of option at expiry - premium paid

Profit / (Loss) per option = 0 - 2.85 = ($2.85)

Dollar loss = loss per option x number of options

Dollar loss= -2.85 x 1800 = (-$5130)

(Note that if nothing is mentioned, each option contract is assumed to be of 100 options)

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