Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)?

Question

Quizplus · Accepted Answer

The pension fund bought the stock at $53 and sold a call option with a $4 premium. If the stock price rises to $56 and the option is exercised, the fund sells the stock at the $50 exercise price. The total income from the option is the $4 premium plus the $50 from selling the stock, totaling $54. Since the fund initially bought the stock at $53, the net gain is $1 per share ($54 - $53).

Assume a Pension Fund Purchased Stock at $53