Question

Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,680, and the index is now at 1,720. What will happen when you exercise the option? You will receive $1,720. You will receive $1,680. You will have to pay $1,680. You will receive $4,000. You will have to pay $4,000. 2 points

Answer 1

Given: Strike/Exercise price : $1680

Current Market price : $1720

Position: Call buyer

To Find: Outcome of exercising the option.

Solution:

A call option refers to a contract which provides the option buyer, the right but not the obligation to buy certain securities at a future date at a price which has been fixed today, known as strike price and where the value of such security is derived from the value of the underlying asset.

This is a derivative contract wherein, only the net amount of the transaction is traded i.e paid or received.

A call buyer will only exercise his right when Current Market Price is greater than the strike or exercise price.

Here, Current market price(CMP) i.e $1720 which is greater than exercise price (EP) of $1680.

Thus, call buyer will exercise his option and his profit would be,

= contract size ×
`(CMP\ -\ EP)`

= 100 index ×
`(1720 -\ 1680)` = + $4000

Hence, one will receive $4000.