Question

Two part question:

What would you earn when you exercise a call option that you bought for a premium of $2 per share and a strike price of $35 per share if the price of the underlying stock was $47 per share on the option’s expiration date?

What would you earn on a put option with a strike price of $20 per share if the underlying stock was selling for $23 per share on expiration day? Assume the premium you paid on this put option was $1 per share.

Answer 1

• In finance, call option refers to as a right to buy the share/ securities at record date at a strike price
• and put option refers to as a right to sell the share/securities at record date at a strike price

1. Gain on exercising the call option:- Mean an agreement has been entered into at today to purchase the underlying at the pre-decided price (being the strike price) irrespective of its market price on the record date (excersing date)

Gain amount $47-$35 = $12

less:- premium paid = $2

Net Gain = $10

2. Loss on exercising the put option:- Mean an agreement has been entered into at today to sell the underlying at the pre-decided price (being the strike price) irrespective of its market price on the record date (excersing date)

Loss amount $23-$20 = $3

add:- premium paid = $1

Net loss = $4

Accordingly, the Combined Net Gain is $6 i.e. $10 - $4