An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is worried the stock price will rise significantly over the next 6 months. The stock is at $45 and she buys a 6-month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss on the entire stock/option portfolio?

Question

Quizplus · Accepted Answer

The investor bought a call option for $250 and the stock price at expiration is $54, which is above the strike price of $50. Therefore, the investor will exercise the call option, buying 100 shares at the strike price of $50, and then selling them immediately at the market price of $54. The profit from exercising the option is ($54 - $50) * 100 = $400. However, the investor also paid $250 for the option premium, which reduces the net gain to $400 - $250 = $150. But since the investor would have made a profit of ($54 - $45) * 100 = $900 if she had just bought the stock outright, the net economic gain or loss on the entire stock/option portfolio is -$750 ($150 - $900).

An Investor Is Committed to Purchasing 100 Shares of World