Final answer:
When writing eight call option contracts with a strike price of $37.50, and the price of the underlying stock is $40.30 on the expiration date, the net loss on this investment is C. $1,360.
Step-by-step explanation:
To determine the net profit or loss on writing eight call option contracts with a strike price of $37.50 when the underlying stock is $40.30 per share at expiration, we first calculate the intrinsic value of the options at expiration. Given that each option contract covers 100 shares, the intrinsic value per contract is the difference between the stock price at expiration ($40.30) and the strike price ($37.50), multiplied by 100. Therefore:
Intrinsic value per contract = ($40.30 - $37.50) × 100 = $280
Total intrinsic value for eight contracts = $280 × 8 = $2,240
The initial income received from selling the eight call option contracts is the call price per share times the number of shares covered by the contracts:
Initial income = $1.10 × 100 × 8 = $880
Your net profit or loss is the initial income minus the total intrinsic value:
Net profit/loss = Initial income - Total intrinsic value = $880 - $2,240 = -$1,360
Therefore, the net loss on this investment is -$1,360, which correlates to option C in the provided choices.