A call option on 100 shares of stock is purchased for a premium of $400. The current price of the stock is $42 per share, and the exercise price is $44 per share. The option is exercised when the stock is selling for $50 per share. What would be your return on the option if after exercising it, you immediately sold the stock at the market price of $50 per share? Ignore taxes and brokerage commissions.
A) 8%
B) 12%
C) 50%
D) 200%

Question

Quizplus · Accepted Answer

The return on the option is calculated as follows: After exercising the option, you buy 100 shares at $44 per share, costing $4,400. You then sell these shares at $50 per share, receiving $5,000. The profit is $5,000 - $4,400 = $600. Since you initially paid a $400 premium for the option, your total profit is $600 - $400 = $200. The return on investment is the profit divided by the initial investment: $200 / $400 = 0.5, or 50%.

A Call Option on 100 Shares of Stock Is Purchased