Question

You purchased a call option for $3.45 17 days ago. The call has a strike price of $45, and the stock is now trading for $51. If you exercise the call today, what will be your holding-period return? If you do not exercise the call today and it expires, what will be your holding-period return?

Answer 1

To calculate the holding-period return (HPR) for a call option, you find the profit by exercising the option and subtract the initial cost of the option. The HPR is then the net profit divided by the initial cost. If the option expires worthless, the HPR is -100% due to the loss of the initial investment.

Step-by-step explanation:

The question involves calculating the holding-period return (HPR) for a call option on a stock. You purchased the call option for $3.45 with a strike price of $45. Now that the stock is trading at $51, if you exercise the option, you will buy the stock at $45 and can immediately sell it at the market price of $51. The profit from this transaction will be $51 - $45 = $6 per share.

However, you also paid $3.45 for the option, so your net profit is $6 - $3.45 = $2.55 per share. The holding-period return is this profit divided by the initial cost of the option, which is $2.55 / $3.45, giving an HPR of approximately 73.91%. If you do not exercise the call option and it expires worthless, your holding-period return would be -100%, as you would lose the entire initial investment of $3.45.

Answer 2

73.9%;-100%

Step-by-step explanation:

1. Calculation to determine what will be your holding period return If you exercise the call today

First step is to determine the Forest profit

If the call is exercised

Gross profit =$51 - 45

Gross profit= $6

Second step is to calculate the Net profit

Net profit =$6 -$3.45

Net profit = $2.55.

Now let calculate The holding period return Holding period return=$2.55/$3.45

Holding period return = .739 *100

Holding period return=73.9%

Therefore If you exercise the call today, what will be your holding-period return will be 73.8%

2. Calculation to determine what will be your holding period return If you do not exercise the call today and it expires,

Holding period return= ($0 -$3.45)/$3.45

Holding period return=-$3.45/$3.45

Holding period return = -1.00*100

Holding period return= -100%

Therefore If you do not exercise the call today and it expires, what will be your holding period return will be -100%