Question

You purchased five Morgan Industries call option contracts with a strike price of $61 when the option was quoted at $2.40. The option expires today when the value of Newell stock is $58. Ignoring trading costs and taxes, what is your total profit or loss on your investment?

		$3,600
		$780
		-$1,200
		-$1,600
		-$2,400

Answer 1

Stike Price = $61

Stock Price = $58

Call Option Premium = $2.40

No. of Contracts = 5

Lot Size = 100

Since, it is a call option, thus it is a right to buy the stock at strike price at $61. We have no obligation to buy at that price. Since stock is available cheaply in the market, it is better for us to buy from market at $58 rather excercising option at $61. Thus, we would allow option to expire worthless. So, Payoff from option would be 0. But we have lost our entire premium which we have paid for acquiring that call option right.

Loss on that call option = Premium Paid = $2.4 * 100 * 5 = $1200.

Thus option (C) i.e. - $1200 is correct.