Question

You write one MBI July 120 call contract (equaling 100 shares) for a premium of $4. You hold the option until the expiration date, when MBI stock sells for $121 per share. You will realize a ________ on the investment.

[A contract consists of 100 shares. Do not add $ in the answer. Use negative sign to indicate loss. ]

Answer 1

Call option gives right to it's holder to buy underlying at specified price in future. Hence Call option will be exercised only when market price is more than the strke price

Option buyer will have to pay premium and option writer will receive premium

Here,

Strike price = $120

Market price as at expiry = $121

Here Market price as at expiry is more than strike price hence option will be exercised

Loss to option writer on exercise of call option = (Market price as at expiry - strike price) X lot size

=(121-120) x 100

=1 x 100

=100$

Premium received by option writer = 4$ x100 = 400$

Thus Net profit = Premium received - Loss on exercise of call option

= 400 - 100

=$300

one will realize 300 on this investment