Question

You purchased four call option contracts with a strike price of $24.00 and a premium of $1.30. At expiration, the stock was selling for $25.50 a share. What is the total amount it cost you to acquire your shares? Multiple Choice $8,620 $10,000 $10,500 $11,860 $10,120

Answer 1

Call Option gives RIGHT to the Buyer to Purchase shares at the Strike Price on Expiration.

As the Strike Price is LOWER than actual price at expiration, it is BENEFICIAL TO EXERCISE the Option.

Therefore, Shares will be Bought at the Strike Price i.e. $24. But, to purchase the Call Options, Premium of $1.3 was paid. Therefore, it should be also be considered while calculating the net purchase price. Therefore, Net Purchase Price = 24+1.3 = $25.3

Total Cost = Net Purchase Price*Number of Contracts*100(which is the normal lot size) = 25.3*4*100 = $10120