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A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the gain/loss per stock to the speculator?Select one:a. $2b. -$2c. -$1d. $1

Question

A speculator purchased a call option with an exercise price of 31forapremiumof31 for a premium of 4. The option was exercised a few days later when the stock price was 34.Whatwasthegain/lossperstocktothespeculator?Selectone:a.34. What was the gain/loss per stock to the speculator?Select one:a. 2b. -2c.−2c. -1d. $1

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Solution

The speculator bought the call option for a premium of 4.Thismeansthattheypaid4. This means that they paid 4 to have the right to buy the stock at $31.

When the stock price rose to 34,thespeculatorexercisedtheiroptiontobuythestockat34, the speculator exercised their option to buy the stock at 31. This means they bought the stock for 31eventhoughitwasworth31 even though it was worth 34 on the market.

So, the speculator made a profit of 34−34 - 31 = $3 per stock due to the increase in the stock price.

However, we must also take into account the 4premiumthatthespeculatorpaidfortheoption.So,thetotalgain/lossperstockforthespeculatoris4 premium that the speculator paid for the option. So, the total gain/loss per stock for the speculator is 3 (profit from stock price increase) - 4(optionpremium)=−4 (option premium) = -1.

So, the answer is c. -$1.

This problem has been solved

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