Question

QUESTION 22 You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment. $200 profit $200 loss $500 profit $500 loss

Answer 1

$500 loss

Step-by-step explanation:

Since you purchased a call contract for IBM stock, you had the option to buy IBM stock at a specified price ($125) within a specified time (?). The problem is that the price of your call contract was higher than the market price at that specific date. Obviously you will not exercise your option in order to limit your losses.

long call profit = Max [0, (current stock price - strike price) x number of shares] - premium paid)

where:

• current stock price = $123
• strike price = $125
• number of shares = 100
• premium paid = $5 x 100 = $500

long call profit = Max [0, ($123 - $125)(100)] - $500 = -$500