Series 7 Exam Question 97: Answer and Explanation

Question: 97

An investor writes a GHI May 40 call for 9. GHI increases to $45 just prior to expiration and the call is exercised. After the investor buys the stock in the market to meet their obligation, what is the gain or loss?

• A. $400 gain
• B. $400 loss
• C. $900 gain
• D. $900 loss

Correct Answer: A

Explanation:

A. The best way to handle this question is to set up an options chart. Check it out:

The investor wrote (sold) the GHI 40 call for 9, so you have to put the $900 (9 × 100 shares per option) received on the Money In side of the chart. Next, it said that the option was exercised. When exercising an option, always exercise at the strike price, which is 40 in this case. So, you need to put $4,000 (40 strike price × 100 shares per option) on the same side as its premium because calls same (when exercising a call, it goes on the same side of the chart as its premium). Then the investor had to purchase the stock in the market to meet their obligation. In this case, the price of the stock was $45, so you have to put $4,500 (45 market price × 100 shares) on the Money Out side of the chart. Total up the two sides of the chart, and you'll see that you have $400 more in than out, so that's the answer.