Question

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment. $200 profit $200 loss $300 profit $300 loss

Answer 1

Answer:

$200 loss

Explanation:

Long call profit = Max [0, ($123 - $120)(100)] - $500 = -$200.

Answer 2

Answer:

$200 loss

Explanation:

A call option allows the investor to purchase a security at a fixed price in a future date (called the expiration date). In this case, the call option allowed you to purchase 100 IBM shares at $120 per share. In order to determine the profit r loss resulting from this investment, you have to consider the price you paid for the call option which is $5.

long call profit = Max [0, ($future price - $call price)(100 shares)] - (call price x 100 shares) = Max [0, ($123 - $120)(100)] - $500 = -$200 or $200 loss.