An investor purchases a call option for $5 per share in a stock currently selling for $24 per share. The exercise price is $30 per share. On the day the option expires, the stock is selling for $29 per share. What will the investor do? What is the investor's total gain or loss?
A) Exercise the option; total gain $500
B) Allow the option to expire; total gain $500
C) Allow the option to expire; total loss $500
D) Exercise the option; total loss $100

Question

Quizplus · Accepted Answer

The investor will allow the option to expire because the stock price ($29) is below the exercise price ($30). Since the option is not exercised, the investor loses the initial investment of $5 per share. If the investor bought 100 shares (a standard option contract size), the total loss is $5 x 100 = $500.

An Investor Purchases a Call Option for $5 Per Share