You purchased a call option for 345 seventeen 17 days ago Th

You purchased a call option for $3.45 seventeen (17) days ago. The call has a strike price of $45 and the stock is now trading for $51. If you exercise the call today, what will be your holding period return?

Solution

Purchasing a call option at $ 3.45 would mean that we are purchasing the right but not an obligation to buy the underlying (here, stock) at the exercise price (here, X = $45) in the future by paying a premium of $ 3.45 today.

Since 17 days ago we purchased call option at X = 45 & the stock is currently trading at $ 51, if get the right to purchase the stock at $ 45 which will give us a profit of $ (51-45) = $6. However the premium of $ 3.45 paid by us will reduce this profit to give us the net return that we earn, thus net return = 6 - 3.45 = $ 2.55

We earned a return of $ 2.55 by holding the call for 17 days, thus holding period return would be the return earned over a period of 17 days expressed as a percentage.

Holding period return (HPR) =

HPR = 2.55 / 45 * 100 = 5.6667%