Question

Suppose you believe that Johnson Company's stock price is going to increase from its current level of $40 sometime during the next 5 months. For $500 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $60 per share. If you buy this option for $500 and Johnson's stock price actually rises to $62, would you exercise your call option? AND what would be your pre-tax net profit or loss from holding this call option?

Answer 1

  

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Call Option is exercised when the closing price is more than the Strike Price

Here the closing price > Strike price = we will exercise.

Net Profit = (Closing Price - Strike Price - Premium) * 100

= (62 - 60 - 0) * 100

= $200

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