Question

Gustavo bought 12 call options on the stock of Cartswell Carts. The stock price is currently $61.75 per share. The strike price was $65, and the option premium was $2.50.

a. Do these options give Gustavo the right to buy or sell shares of the company? How many shares does he have the right to buy/sell?

b. Calculate the total amount Gustavo paid for these options.

c. Calculate his profi t or loss if the price rises to $75 a share.

d. Calculate his profi t or loss if the price rises to $65 a share.

e. Calculate his profi t or loss if the price drops to $55 a share

Answer 1

a) Call options give Gustavo the right to buy the shares of the company. Gustavo will have right to buy 12 Shares of Cartswell Carts.

b) Total Amount paid by Gustavo = 12 Call Options x $2.50 = $30

c) Market Price = $75 Per Share

Net Profit = (MPS-Strike Price-Option Premium) x No. of Options = (75-65-2.50) x 12 = $90

d) Market Price = $65 Per Share

Net Loss = (MPS-Strike Price-Option Premium) x No. of Options = (65-65-2.50) x 12 = $30

e) Market Price = $55 Per Share

Net Loss = (Option Premium) x No. of Options = (2.50) x 12 = $30