USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
On the last day of October, Bruce Springsteen is considering the purchase of 100 shares of Olivia Corporation common stock selling at $37 1/2 per share and is considering an Olivia option.

-Refer to Exhibit 14.1. If Bruce decides to buy a March call option with an exercise price of 35, what is his dollar gain (loss) if he closes his position when the stock is selling at 43 1/2?
A) $225.00 loss
B) $350.00 loss
C) $225.00 gain
D) $350.00 gain
E) $850.00 gain

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
On the last day of October, Bruce Springsteen is considering the purchase of 100 shares of Olivia Corporation common stock selling at $37 1/2 per share and is considering an Olivia option.
 
-Refer to Exhibit 14.1. If Bruce decides to buy a March call option with an exercise price of 35, what is his dollar gain (loss) if he closes his position when the stock is selling at 43 1/2?
A) $225.00 loss 
B) $350.00 loss 
C) $225.00 gain 
D) $350.00 gain 
E) $850.00 gain

Quizplus · Accepted Answer

If Bruce decides to buy a March call option with an exercise price of 35, he pays a premium of $4 per share ($400 per contract) as shown in the exhibit. If he buys 1 contract, he pays $400. 
If the stock price at expiration is less than $35, the option will expire worthless and Bruce will lose the premium paid of $400. 
If the stock price at expiration is more than $35, Bruce will exercise the option and buy 100 shares of Olivia Corporation at $35 each. He will then be able to sell the shares at the market price of $43 1/2, making a profit of $8 1/2 per share or $850 in total. 
However, Bruce may decide to close his position before expiration. If the stock price is selling at 43 1/2 and he closes his position by selling the call option, he will make a profit of $850 (100 shares x $8 1/2 gain per share) minus the premium paid of $400, which results in a profit of $450. Therefore, the correct answer is D.