Question

An investor purchases a call option with an exercise price of $55 for $2.60. The same investor sells a call on the same security with an exercise price of $60 for $1.40. 3 months later, the stock price is $56.75. What is the net profit or loss to the investor?

Answer 1

Call option 1: Exercise price = $55

Call option 2: Exercise price = $60

Total price of call options = 2.6 + 1.4 = $4

If the price of the stock is $56.75, the investor would use Call option 1 to buy the stock at $55 itself.

The profit earned through this = $56.5 - $55 = $1.5

Net profit = $1.5 - $4

= - $2.5

Hence, the investor would make a net loss of $2.5