Question of the Week

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 gain of $4,375.00
b) A loss of $7,687.50
c) A loss of $3,312.50
d)


Answer:

The correct answer is: b)

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