Question

A speculator buys a call option with a strike of $50 for $2.61. The stock is currently priced at $51.06 and moves to $52.32 on the expiration date. The speculator will exercise the option on the expiration date (if it is feasible to do so). What is the speculator's profit or loss per share? (Do not ignore the premium paid.)
Blank 1. Calculate the answer by read surrounding text.

Answer 1

What is the speculator's profit or loss per share?

Answer: loss of ($0.29)

Workings:

Formula for calculating profit or loss per share is as follows;

Profit or loss per share = market price on the date of expiry – strike price – premium paid

                                                = $52.32 - $50 - $2.61

                                                = - $0.29

Loss per share to speculator = ($0.29)

Call option gives the holder a right to purchase the underlying asset at an agreed strike price or exercise price on maturity date. Call option is exercised when market price is more than strike price.

In the given case market price on the date of expiry is more than the strike price, so call option will be excised. Since premium paid for the call option is more than that of increase in share price call holder will end up in loss.

Details provided in the question

Market price on the date of expiry = $52.32

Strike price = $50

Premium paid = $2.61