An investor purchases a call option with an exercise price of $55 for $2.60.The same investor sells a call on the same security with an exercise price of $60 for $1.40.At expiration,3 months later,the stock price is $56.75.All other things being equal and given an annual interest rate of 4.0%,what is the net profit or loss to the investor?

Question

Quizplus · Accepted Answer

To calculate the net profit or loss, we need to calculate the payoff from each option and subtract the initial cost.

For the purchased call option:
Payoff = max(0, $56.75 - $55) = $1.75
Profit = $1.75 - $2.60 = -$0.85

For the sold call option:
Payoff = max(0, $56.75 - $60) = $0
Profit = $1.40 - $0 = $1.40

The net profit or loss is the sum of the profits from each option:
Profit = -$0.85 + $1.40 = $0.55

To annualize the profit, we need to adjust for the 3-month holding period and the 4.0% annual interest rate:
Annualized profit = $0.55 / (3/12) / (1 + 0.04) = $0.54

Therefore, the net profit to the investor is $0.54 gain, which corresponds to choice C.

An Investor Purchases a Call Option with an Exercise Price