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Calculate the profit or loss on transaction

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Reference no: EM13225129

Allen has been investing in the stock market for quite some time and had some success with equity investments.Recently, a friend suggested that he start to use options in his portfolio as a means to increase his returns.Allen decided to purchase a March, 2009 expiration call option on Stock X, which carried an exercise price of $500 that was selling for $15.Two weeks later, shares of Stock X were trading for $480.6.Now that the stock price is lower than the purchase price, the options are worthless.However, when Allen waited an additional two weeks, the stock price climbed to $510.Allen, feeling a bit of anxiety, decides to exercise the option and realize some gains.

  • In exercising this option, what price is Allen getting the stock for?
  • What is the value at exercise of the option?
  • Calculate the profit or loss on this transaction.
  • How might Allen have covered this position to limit his exposure?
  • How might you use calls like this to increase an investments performance?

Reference no: EM13225129

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