Question

Ruth paid $300 for a call option on 100 shares of stock. The option gives her the right to buy the stock for $37 per share until April 1. On March 15, the stock rises to $42 per share, and Ruth exercises her option, purchases the stock and then sells it in the market. What is Ruth's return on the option?

A) 167%
B) 67%
C) 100%
D) 150%

Answer 1

Ruth's return on the option is approximately 67%, calculated by dividing her profit of $200 by the cost of the option $300 and then multiplying by 100%.

Step-by-step explanation:

Ruth paid $300 for a call option to buy 100 shares of stock at $37 per share. The stock later rose to $42 per share. On exercising her option, Ruth would have paid $37 x 100 = $3,700 to buy the shares. She then sold them at $42 x 100 = $4,200. The return from the sale of the shares is $4,200 - $3,700 = $500. After subtracting the cost of the option, her profit is $500 - $300 = $200. To find the return on the option, we calculate (Profit/Cost of Option) x 100%, which gives us (200/300) x 100% = 66.67%, which is approximately 67%.