You have purchased a call option contract on Smith & Smithcommon stock. The opti

Question

You have purchased a call option contract on Smith & Smithcommon stock. The option contract is for 100 shares. The option has an exercise price of $ 43.00 and S&S’s stock currently trades at $40.00. The option premium is quoted at $ 2.00. Show your work.

A) If the stock price rises to $42.00, would you exercise or not exercise the option and what would be your gain or loss?

B) You will make a profit on the option if the S&S stock price rises above what amount? To earn a profit, you must recoup the price you paid for the call, plus the exercise price:

Explanation / Answer

A) Since the Future Stock price is less than the Strike price, thus, we will not exercise the Call Option.
Total Loss = Premium Amount = 100 x 2 = $200

B) Stock price above which we start making profit = Premium amount + exercise price = 43 + 2 = $45

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