Suppose that you purchased a call option on the S&P 100 Index. The option has an exercise price of 1,700, and the index is now at 1,760. What will happen when you exercise the option?
A. You will have to pay $6,000.
B. You will receive $6,000.
C. You will receive $1,700.
D. You will receive $1,760.
E. You will have to pay $7,000.
B. You will receive $6,000.
When an index option is exercised, the writer of the option pays cash to the option holder. The amount of cash equals the difference between the exercise price of the option and the value of the index. In this case, you will receive 1,760 1,700 = 60 times the $100 multiplier, or $6,000. In other words, you are implicitly buying the index for 1,700 and selling it to the call writer for 1,760.
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