You have purchased a call option contract on GE common stock. The option has an
ID: 2719900 • Letter: Y
Question
You have purchased a call option contract on GE common stock. The option has an exercise price of $79.00 and GE stock currently trades at $80.43. The option premium is quoted at $2.17 per contract (1 contract = 100 shares).
a. Calculate your net profit/loss on the option contract if GE stock price rises to $83.00. (Show your calculations)
Would you exercise the option in scenario (a)? Circle your answer: YES NO
b. Calculate your net profit/loss on the option contract if GE stock price falls to $79.50. (Show your calculations)
Would you exercise the option in scenario (b)? Circle your answer: YES NO
c. Below, graphically show your answers to parts (b) and (c) in the profit and loss diagram. In the graph be sure to add the exercise price (X), the payoff structure from the option, the profit/loss amount on the y-axis for parts (b) and (c).
Explanation / Answer
(a) when GE Stock price rises to $ 83.00
Market price of GE Stock = $ 83.00
Exercise price of option = $79.00
Gross Pay off = Market price - Exercise price
=$83.00 - $79.00
=$4
Net Payoff = Gross Payoff - option premium
= $ 4 - $ 2.17
= $ 1.83
Total Net profit = No. of Share * Net payoff
= 100 * $1.83
= $ 183
YES, buyer of Call Option exercise because Market price > exercise price.
(b) when GE Stock price falls to $ 79.50
Market price of GE Stock = $ 79.50
Exercise price of option = $79.00
Gross Pay off = Market price - Exercise price
=$79.50 - $79.00
=$0.5
Net payoff = Gross Payoff - option premium
= $ 0.5 - $ 2.17
= ($ 1.67)
Total Net Loss = No. of Share * Net Payoff
= 100 * $1.67
= $ 167
YES, buyer of Call Option exercise because Market price > exercise price.
( c ) See Image
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