Jorge has purchased call options on 1000 shares of Amazon stock with a striking price of $270 per share. The option premium was $4.00 per share
a. Compute Jorge's profit or loss if the market value of Amazon's stock is $280 at expiration.
b. Compute Jorge's profit or loss if the market value of Amazon's stock is $260 at expiration.
c. Compute Jorge's profit or loss if the market value of Amazon's stock is $272 at expiration.
Answer:
a. Profit on the stock = $10 × 1000 = $10,000. Subtracting the premium, $10,000 - $4(1000) = $6,000 profit.
b. The option will not be exercised. Jorge loses the $4,000 option premium.
c. Profit on the stock = $2 × 1000 = $2,000. Subtracting the premium, $2,000 - $4(1000) = ($2,000) loss.
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