Question

You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date when IBM stock sells for $123 per share. You will realize a ______ on the investment. Each contract is for 100 shares of stock. $200 profit $200 loss $500 profit $500 loss

Answer 1

The answer is D. $500 loss

Step-by-step explanation:

A call option gives its holder the right but not the obligation to buy the underlying asset(IBM shares) The holder of a call option is expecting the price of the underlying asset to rise. If the price rises above the exercise price or strike price the holder will exercise right and vice-versa.

In this question, the premium of $5 had already been paid.

At initiation, the price of IBM stock was $125

At expiration date, the price fell to $123

Because, the holder of call option is expecting the price of IBM stock to rise but it fell, he will not exercise this option.

The holder will incur a loss equivalent to the premium he had already paid.

Premium per share is $5

Therefore, for 100 shares, it will be $500($5 x 100)

The holder incurs a loss of $500