In the two questions below answers included how do you, Ask an Expert

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In the two questions below (answers included) how do you determine if it is a short call or long call?

1. You write one IBM July 129 call contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $130 per share. You will realize a ______ on the investment.

Answer: $200 profit
Short call profit = Min [0, ($120 - $121)(100)] + $400 = $300

2. You purchase one IBM July 122 call contract for a premium of $7. You hold the option until the expiration date, when IBM stock sells for $127 per share. You will realize a ______ on the investment.

Answer $200 loss
Long call profit = Max [0, ($123 - $120)(100)] - $500 = -$200

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