Question

An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is worried the stock price will rise significantly over the next six months. The stock is at $45 and she buys a six-month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss on the entire stock/option portfolio?

Answer 1

Answer:

The answer is: net economic loss = -$750

Explanation:

To determine the economic gain or loss of this investor we can use the following formula:

economic loss = {[(current stock price - future stock price) x number of stocks] + [(future stock price - strike value) x number of stocks]} - cost of call option

economic loss = {[($45 - $54) x 100] + [($54 - $50) x 100]} - $250 =

economic loss = [(-$9 x 100) + ($4 x 100)] - $250 = (-$900 + $400) - $250

economic loss = -$500 - $250 = -$750