Question

you anticipate Apple's stock going up in the future. You have $10,000 to invest. To profit from your hunch, you can either: a.) Purchase shares, or b.) Purchase call options The current stock price is $100. The price of a call option with a strike price of $100 and expiration date 30 days from now is $2.

What is your profit from purchasing options if the stock price in 30 days is $101.75? (enter gains as positive and losses as negative)

Answer 1

PROFIT FROM OPTIONS CONTRACT

Investment available = 10000

call premium = 2

Each call option contract is of 100 shares

No of contracts that can be purchased of call options : = 10000/(2 x 100)  = 50

so we can purchase 50 contracts, that is total 5000 shares under call option.

Price after 30 days = 101.75

As price after 30 days is higher than strike price, call option will be exercised.

Payoff per share on call options = 101.75 - 100 = 1.75

Total payoff on 5000 shares = 5000 x 1.75 = 8750

Profit = Payoff - premium paid

Profit = 8750 - 10000 = - 1250

Answer : -1250