Question

You invest in the Applied Material (AMAT) July 35 call option that is currently quoted at $3 (the option premium). If you hold the option until the expiration date when the AMAT stock sells for $30/share, your return on the option would be______

O 40%
O -66.7%
O -100%
O 66.7%

Answer 1

The correct answer is option 3. If you hold the AMAT July 35 call option until expiration and the stock sells for $30/share, your return on the option would be -100% as the option becomes worthless and you lose your entire investment.

Step-by-step explanation:

The question involves calculating the return on an investment in a call option for Applied Materials (AMAT). If you buy a July 35 call option for $3 and hold it until expiration, your option allows you to purchase AMAT stock at $35 per share. However, if at expiration the stock is selling at $30 per share, your option is out-of-the-money and essentially worthless since you would not exercise the option to buy at $35 when the market price is $30.

Therefore, you would lose the entire premium paid for the option, which is $3. This represents a -100% return on the option investment as you have lost the full amount of your initial investment.