You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60.What is your total profit on this investment if the price of JIG is $46.05 on the option expiration date?
A)−$5,050
B)−$4,450
C)$4,100
D)$4,450
E)$5,050

Question

Quizplus · Accepted Answer

Since you wrote call options, you are obligated to sell the stock at the strike price if the option is exercised. The options will be exercised because the stock price at expiration ($46.05) is above the strike price ($41). For each contract, the difference between the stock price and the strike price is $5.05 ($46.05 - $41), but since each contract represents 100 shares, the loss per contract is $505 ($5.05 * 100). However, you initially received a premium of $0.60 per share, or $60 per contract ($0.60 * 100). For ten contracts, the total premium received is $600 ($60 * 10). Therefore, the total loss is $5,050 ($505 * 10) from the stock price difference, offset by the $600 received from selling the options, resulting in a net loss of $4,450 ($5,050 - $600).

You Wrote Ten Call Option Contracts on JIG Stock with a Strike