Question

John buys 100 shares of ABC Corporation at option pricing. The current price of the share is $12.00, and the strike price is $80. The option has to be exercised before the expiry of one month. The price of the stock increases to $120 and John exercises his option before the expiry date. What is John's position?

He gains $3,000
He loses $2,800
He gains $2,800
He loses $3,000

Answer 1

The option price refers to the price that John paid for the option, which is not given in the problem. Without knowing the option price, we cannot determine John's position accurately.

However, we can calculate the profit or loss that John makes from exercising the option based on the given information. If John exercises the option when the stock price is $120, he can buy 100 shares of ABC Corporation at the strike price of $80 per share, and then sell them in the market at the current price of $120 per share. Therefore, his profit would be:

Profit = (selling price - buying price) x number of shares
Profit = ($120 - $80) x 100
Profit = $4,000

However, this profit does not take into account the option price that John paid, which would reduce his overall profit. If the option price is less than $200, John would still make a profit from exercising the option, but if the option price is more than $200, John would make a loss.