Questions: An investor purchased an SP 100 (OEX) July 720 Call 6.50. He exercises the option when the index is at 731.26. The investor has a: A 4.76 gain B 4.76 loss C 476.00 gain D 476.00 loss

The answer is C: $476.00 gain.

Explanation:

To determine the gain or loss from exercising the option, we need to calculate the intrinsic value of the option at the time of exercise and compare it to the premium paid.

1. Intrinsic Value Calculation:

   • The investor purchased a call option with a strike price of 720.
   • The index is at 731.26 when the option is exercised.
   • The intrinsic value of the call option is calculated as the difference between the index level and the strike price: \[ \text{Intrinsic Value} = 731.26 - 720 = 11.26 \]

2. Premium Paid:

   • The investor paid a premium of $6.50 for the option.

3. Net Gain/Loss Calculation:

   • The net gain is the intrinsic value minus the premium paid: \[ \text{Net Gain} = 11.26 - 6.50 = 4.76 \]

4. Monetary Gain:

   • Since the option is on the S&P 100 index, which is typically settled in cash, the gain is multiplied by 100 (the standard multiplier for index options): \[ \text{Monetary Gain} = 4.76 \times 100 = 476.00 \]

Therefore, the investor has a $476.00 gain.

Explanation for each option:

• A $4.76 gain: Incorrect, as this does not account for the standard multiplier of 100 for index options.
• B $4.76 loss: Incorrect, as the intrinsic value exceeds the premium, resulting in a gain, not a loss.
• C $476.00 gain: Correct, as calculated above.
• D $476.00 loss: Incorrect, as the investor experiences a gain, not a loss.