Question

Ricardo initially bought call option on shares of UCV Corp. on September 11th, 2020, with 3 months maturity. At the time, the shares were trading at $9.57 per share, the call premium was $0.50 and the strike price was $10.02. On the maturity date of the option, the shares of UCV Corp. are now trading at $11.55. The profit on the option strategy is...

Answer 1

Calculation of Profit on Option Strategy:

Share price on Maturity date (1) = $ 11.55

Strike Price (2) = $ 10.02

Call Premium (3) = $ 0.50

Call option means the holder of the call option has a right to buy the shares at the agreed strike price after certain period of time. The Holder gets that right by paying the call premium to exercise the option.

On the maturity date, the shares are trading at $ 11.55 per share, however the agreed strike price is $ 10.02. the holder got this right by paying the premium of $ 0.50. therefore, the profit is (1) - (2) - (3).

Profit on Option Strategy = 11.55 - 10.02 - 0.50 = $ 1.03

Profit on Option Strategy = $ 1.03

Note: Time value of money is ignored in this calculation, as the interest rates are not available.