Explanation:
Gross profit = $55 - $47 = $8 per share
$8 × 100 shares × 5 contracts = $4,000
Additional commission costs = 1.25% × ($55 × 100 shares × 5 contracts) + 1.25% × ($47 × 100 shares × 5 contracts)
= 1.25% × ($27,500 + $23,500) = 1.25% × $51,000 = $637.50
Wait — correction: The explanation says:
Additional commission costs = 1.25% × (
$55× 100 shares × 5 contracts) + 1.25% × ($47× 100 shares × 5 contracts)
= 1.25% × ($27,500 +$23,500) =$637.50
But then it says:
Total commission costs =
$59.50+$637.50=$697.00
So let’s verify that:
$55 × 100 × 5 = $27,500$47 × 100 × 5 = $23,500$51,000$51,000 = 0.0125 × 51,000 = $637.50 — correct.Then where does $59.50 come from? Possibly the initial premium paid (or maybe a fixed fee), but not explained.
Then:
Total commission costs = $59.50 + $637.50 = $697.00
Net profit = $4,000 − $3,500 − $697.00 = −$197.00
(Book 3, Module 38.2, LO 38.d)
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Question 54 of 100
Using the information above, what is the net profit or loss if the stock declines to $47 before expiration and the option holder were to exercise and then buy the stock?
A
$197.00 loss.
B
$127.40 loss.
C
$206.25 profit.
D
$440.50 profit.
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