Question

You buy 100 shares of Ford for $45/share and simultaneously sell a 50 call option (100 shares) for $1.70. If Ford is trading at $44, your profits are _____.

need explanation

a. 70 Correct answer

b. -100

c. 100

d. 170

Answer 1

100 share of Ford are bought at $45/share

and a 50 call option is sold at price of $1.70

So, money received from selling of the call option = call price*contract multiplier = 1.7*100 = $170

Final stock price = $44

So, profit on 100 share of Ford = selling price - purchase price = (44 - 45)*100 = -100

Since call option is expired out-of-the-money, this option will not be exercised.

So, total profit = money received on call option selling + profit of ford share = 170 - 100 = $70

So, option a is correct.