You have purchased a call option contract on Smith & Smith common stock. The opt
ID: 2744305 • Letter: Y
Question
You have purchased a call option contract on Smith & Smith common stock. The option contract is for 100 shares. The option has an exercise price of $23.00 and S & S’s stock currently trades at $21.00. The option premium is quoted at $3.00.
a. If S & S’s stock price rises to $24.00, will you exercise the option? Calculate your net profit/loss on the option contract.
b. If S & S’s stock price rises to $28.00, will you exercise the option? Calculate your net profit/loss on the option contract.
c. If S & S’s stock price rises to $22.00, will you exercise the option? Calculate your net profit/loss on the option contract.
d. You will make a profit on the option if the S & S stock price rises above what amount?
Explanation / Answer
A call option shall be exercised only when thee stock price on the date of expiry of option is more than the exercise price of the option. If the option is exercised the profit shall be the Stock price less the option premium and strike price. The option is not exercised the loss shall be the option premium.
a.
The stock price is more than the exercise price, hence option shall be exercised.
Net loss = $24 - $23 - $3 = $2
Here the option is exercised even in case of loss because if the option is not exercised, loss shall be more i.e. $3
b.
Option shall be exercised.
Net profit = $28 - $23 - $3 = $2
c.
Option shall not be exercised.
Net loss = $3
d.
If the stock price exceeds the sum of exercise price and premium, i.e. $23 + $3 = $26, then there will be profit.
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