Bob's DJIA Index option had a strike price of 125. When he exercised the option, the Dow was at 13,050.
A) Bob received $5,500 from the writer of the contract.
B) Bob paid $550 to the writer of the contract.
C) Bob received $550 from the writer of the contract.
D) Bob received $55,000 from the writer of the contract.

Question

Quizplus · Accepted Answer

When Bob exercised his option, the Dow was at 13,050 which is below the strike price of 125. Therefore, the option is "out of the money" and worthless to Bob. However, since Bob had paid a premium when he bought the option, the writer of the contract owes him the amount of the premium, which is $550. Therefore, Bob received $550 from the writer of the contract.

Bob's DJIA Index Option Had a Strike Price of 125