Peter owns ten European DFG 25 calls with an expiration date in September. Peter bought the calls at a price of $1.05. Today the 25 calls are priced at $13.40. Yesterday, June 14^th, DFG stock doubled in price to $42.80 a share. Today the stock is selling for $37.30 a share. Peter wants to profit from this sudden price surge before the price falls further. Ignore commissions and trading costs. Peter should: A) Exercise his option, sell 1,000 shares of DFG stock, and make a profit of $12,300. B) Exercise his option, sell 1,000 shares of DFG stock, and earn a net profit of $11,250. C) Sell his options and earn a net profit of $12,350. D) Sell his options and earn a net profit of $13,400. E) Peter cannot currently profit from owning his DFG calls.

Question

Quizplus · Accepted Answer

Peter will earn more by selling the options directly in the market rather than exercising them. The profit from selling the options is calculated as follows: (Current option price - Purchase price) * Number of options * 100 = ($13.40 - $1.05) * 10 * 100 = $12,350. This does not require exercising the options and directly selling the underlying stock, which would involve additional steps and potentially different profit calculations.

Peter Owns Ten European DFG 25 Calls with an Expiration