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Subject:FinancePrice:2.86 Bought5
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FACTS
(1) The call option covers 100 shares
(2) The option price is $310.25
(3) Stock price rises to $45
(4) Current stock price is $22.50
(5) You would pay$25 for the stock should you exercise the option
SOLUTION
Step 1
To calculate the pre-tax profit, you compute the profit you would make per share, and then deduct the amount you paid for the call option. Since you bought the call option when the price was $22.50, and you would pay $25 per share, and the stock price has now risen to $45, your profit per share is:
Profit per share = $45 - $25 = $20...
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You have already have Step 1
Step 1
To calculate the pre-tax profit, you compute the profit you would make per share, and then deduct the amount you paid for the call option. Since you bought the call option when the price was $22.50, and you would pay $25 per share, and the stock price has now risen to $45, your profit per share is:
Profit per share = $45 - $25 = $20...
Step 2
We calculated the pre tax profit per share in the previous step as $20. The call option covers 100 shares. Hence, the total pre tax profit from the option that covers 10 shares = Profit per share x Number of shares covered by option = $20 x 100= $ 2,000
Step 3
The option buyer paid a price of $310.25. Hence, the net profit of the buyer = total pre tax profit from the option - price paid for the option = $2,000 - $310.25 = $ 1,689.75
