Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson's stock price actually rises to $45, what would your pre-tax net profit be?
A) -$310.25
B) $1,689.75
C) $1,774.24
D) $1,862.95
E) $1,956.10

Question

Quizplus · Accepted Answer

The net profit is calculated as follows: If the stock price rises to $45, you can exercise the option to buy 100 shares at $25 each, then sell them at $45 each. The profit from the sale is (45 - 25) * 100 = $2,000. Subtract the cost of the option, $310.25, from this profit: $2,000 - $310.25 = $1,689.75.

Suppose You Believe That Johnson Company's Stock Price Is Going