An investor purchases 25 call option contracts at a price of $1.86 and a strike price of $50. At expiration, the stock price is $47.62. What is the profit on this transaction?
A) -$10,600
B) -$5,950
C) $1,300
D) -$4,650
E) $5,950

Question

Quizplus · Accepted Answer

Since the stock price at expiration is below the strike price, the call options expire worthless. The investor loses the entire premium paid for the options, which is 25 contracts x $1.86 = $46.50 per contract or ($46.50 x 100 shares/contract) x 25 contracts = $116,250. The profit on this transaction is the opposite of the loss, so it is -$116,250. However, to calculate the profit, we need to subtract the cost of purchasing the options, which is 25 contracts x $50 strike price x 100 shares/contract = $125,000. Therefore, the profit is -$116,250 + $125,000 = -$8,750, which is closest to answer choice D.

An Investor Purchases 25 Call Option Contracts at a Price