Tom Smith purchases 100 shares of DOUBLE Systems stock for $63 per share and wishes to hedge his position by writing a 100 share call option on his holdings. The option has a $65 strike price and a premium of $8.75. If the stock is selling at $64 at the time of expiration, what will be the overall dollar gain or loss on this covered option play? (Consider the change in stock value as well as the gain or loss on the option.)
A)$975.00
B)$875.00
C)$775.00
D)$100.00
E)$87.50

Question

Quizplus · Accepted Answer

The gain on the call option would be 100 X $8.75 = $875, and the appreciation on the long position = 100 X $1 = $100.

Tom Smith Purchases 100 Shares of DOUBLE Systems Stock for $63