A:
An investor has bought 25 call options on oil. The exercise price of the call is $29.45 per barrel and each call represents 250 barrels. If the premium was $1.23 per barrel, and the price of oil closes at $28.75 at expiration, what will be the net profit or loss to the investor?
a) A loss of $7,687.50
b) A loss of $4,375.00
c) A gain of $4,375.00
d) A loss of $3,312.50

The correct answer is: a)
Rule for a long call position:
If at expiry, the asset price settles below the expiry price, Do Not Exercise.
Therefore, the loss = premium.



Premium = ($1.23/barrel)*(250 barrels per contract)*(25 call contracts) = $7,687.50
2006 CFA Level 1 LOS: 16.74.a




RELATED FAQS
  1. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  2. Why are call and put options considered risky?

    Learn why put and call options are considered risky and see how, depending on which side of the contract you are on, you ... Read Answer >>
  3. Is it more advantageous to purchase a call or put option?

    Learn the advantages of put and call options to choose the right side of the contract to meet your personal investment objectives. Read Answer >>
  4. What is the difference between a covered call and a regular call?

    Learn what a call option is, what two strategies call options can be used for, and the difference between a covered call ... Read Answer >>
  5. How can I profit with call options?

    Learn what a call option and a long call strategy are, how to speculate stock price increases using a call option and how ... Read Answer >>
  6. What options strategies are best suited for investing in the oil & gas drilling sector?

    Invest in the oil and gas drilling sector with confidence by employing one of several winning options strategies that work ... Read Answer >>
Related Articles
  1. Trading

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  2. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  3. Trading

    How To Buy Options On the Dow Jones

    We show why buying options on the Dow Jones is a good alternative to trading the exchange-traded fund.
  4. Trading

    The Basics of Covered Calls

    Learn how this simple options contract can work for you, even when your stock isn't.
  5. Trading

    Strategies for Trading Volatility With Options (NFLX)

    These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility.
  6. Investing

    Risk Management Techniques For Shorting Call Options (IBM)

    Shorting covered calls is a popular options trade strategy. Here are the methods to mitigate the risk/loss and enhance profits for selling covered calls
  7. Investing

    Long on Oil? Hedge Falling Oil Prices with Options

    With no end to the oil slump in sight, here are some risk management strategies using options to protect your oil positions.
  8. Investing

    How To Buy Oil Options

    Crude oil options are widely traded energy derivatives, with a twist. They're options on futures, giving the investor some advantages over oil futures.
  9. Retirement

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  10. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
RELATED TERMS
  1. Exercise Price

    The price at which the underlying security can be purchased (call ...
  2. Call On A Call

    A type of compound option in which the investor has the right ...
  3. Low Exercise Price Option - LEPO

    A call option with an exercise price of 1 cent, and an agreement ...
  4. Early Exercise

    The exercise of an option prior to its expiration date. Early ...
  5. Call On A Put

    One of the four types of compound options, this is a call option ...
  6. Box Spread

    A dual option position involving a bull and bear spread with ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center