You Sold (Wrote) Five TWX Call Option Contracts with a Strike

question 232

Multiple Choice

You sold (wrote) five TWX call option contracts with a strike price of $40 when the option was quoted at $3.20. The option expires today when the value of TWX stock is $38.15. Ignoring trading costs and taxes, what is the total profit or loss on your investment?

• A) -$1,600
• B) -$675
• C) $0
• D) $500
• E) $1,600

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Definitions:

Warrants

Options issued by a company that give the holder the right to purchase the company's stock at a specified price before a certain date.

Diluted Earnings

Earnings per share calculated by including the effects of all potential dilutive securities, which could decrease earnings per share by increasing the number of shares outstanding.

Potential Dilutive Effect

The possible impact on a company’s earnings per share if convertible securities were converted into common stock, often considered in financial analysis.

If-Converted Method

A calculation technique used to assess the impact on diluted earnings per share if all convertible securities were converted into common stock.