Suppose you purchase a call option for $4 and a strike price of $30.On the expiration day,the price of the stock is $40.What is the return on the call option if you hold your position until maturity?
A)125%
B)130%
C)150%
D)170%
E)250%

Question

Quizplus · Accepted Answer

The call option gives the holder the right, but not the obligation, to buy the underlying stock at the strike price of $30. If on the expiration day, the stock price is $40, the option holder can exercise the option and buy the stock at $30 and sell it at $40 in the market, resulting in a profit of $10.

Since the initial cost of the call option is $4, the profit from exercising the option would be $6 ($10 - $4). Hence, the return on the call option would be ($6/$4) x 100% = 150%.

Suppose You Purchase a Call Option for $4 and a Strike