If you were given Puts or Calls

Question 1

Suppose your long lost great aunt left you a call option in her will
(ie you were given a long call)
K=$40 and S=$47
The option expires today.
Will you exercise this option?
What will your profit or loss be from exercising the option? (in other words, what is the option’s intrinsic value)

Answer 1

You will exercise it
By exercising it, you will make IV=$7

If you exercise the option, you will pay $40 for something that is worth $47.
You will exercise it for $47-$40=$7 per share.
Woohoo! Go, auntie!
Note: if you had purchased the option rather than having it given to you, then we would need to include the option premium in our P/L calculations. This is just a warmup example, though, to help you think things through.