Question

Suppose you believe that Bennett Environmental's stock price is going to increase from its current level of $ 33.29 sometime during the next 7 months. For $ 309.19 you could buy a 7-month call option giving you the right to buy 100 shares at a price of $ 27 per share. If you bought a 100-share contract for $ 309.19 and Bennett's stock price actually changed to $ 32.19 , your net profit (or loss) after exercising the option would be ______?

Answer 1

Answer: $210

Explanation:

Seeing as the price actually dropped instead of rising, it would make no sense to exercise the option if it falls below the Option price of $27. It did not so we can then calculate for profit if you exercise the option.

First we will calculate the profit per share by the following,

Profit = Current Stock Price - Drop in Stock Price

= 32.19 - 27

= $5.19

Means your profit per share is $5.19

We then have to calculate the premium you paid for the contract as,

= 309.19/100

= $3.09 per share was paid.

Your profit then from each share is,

= 5.19-3.09

= $2.1 per share.

Your net profit is therefore,

= 2.1 * 100 shares

= $210

Your net profit after exercising the option would be $210