Question

An investor purchases a call option in a stock that is currently selling for $50 per share on January 3, 2016. He pays $6 per share for the option with an exercise price of $57 and an expiration date of April 17, 2016. On April 16, 2016 the stock is selling for $58 and the investor exercises the option and immediately sells the stock. How much total gain or loss did the investor realize?

A) -$500
B) $100
C) Breakeven
D) $700

Answer 1

The investor realized a total loss of $5.

Step-by-step explanation:

To calculate the total gain or loss realized by the investor, we need to consider two components: the cost of the option and the difference between the stock price at the expiration date and the exercise price.

1. The cost of the option is calculated by multiplying the price per share ($6) by the number of shares held by the investor. In this case, the investor only holds one option, so the cost is $6.
2. The difference between the stock price at the expiration date and the exercise price is calculated by subtracting the exercise price ($57) from the stock price at the expiration date ($58) and multiplying it by the number of shares held by the investor. In this case, the investor only holds one option, so the difference is ($58 - $57) * 1 = $1.
3. The total gain or loss is the difference between the stock price at the expiration date and the exercise price, minus the cost of the option. In this case, the total gain or loss is $1 - $6 = -$5.

Therefore, the investor realized a total loss of $5.