Question

An investor with no other positions sells 1 ABC Dec 55 call at 4.50. If the call is exercised when the stock is trading at 57.25, what is the investor's profit or loss?

A) $275 loss.
B) $275 profit.
C) $225 profit.
D) $225 loss.

Answer 1

The investor's profit is $275.

Step-by-step explanation:

To calculate the investor's profit or loss, we need to consider the selling price of the stock and the premium received from selling the call option. The call option has a strike price of $55 and is exercised when the stock is trading at $57.25. This means the investor needs to sell the stock at $55, even though it is trading above that price.

The investor received a premium of $4.50 for selling the call option. Therefore, the investor's profit or loss can be calculated as follows:

• Profit or loss = Selling price of stock - Strike price of call option + Premium
• Profit or loss = $55 - $57.25 + $4.50
• Profit or loss = -$2.25 + $4.50
• Profit or loss = $2.25

Since the investor received a positive value for profit or loss, the correct answer is B) $275 profit.