Consider an index option. The index is at 500, and a two-month call with an exercise price of 450 is priced at $70. You are in 31 percent tax bracket. Compute the after-tax profit for the following cases. Assume 100 calls.

S X C

500 450 70

a. You buy the call. One month later, the index is at 510 and the call is at $65. You sell the call.

S(t) C(t) Profit = Tax = A-T Profit =

510 65

b. You buy the call and hold it until expiration, whereupon the index is at 530. You exercise the call. Assume the long-term capital gains tax rate is 15%.

S(t) Purchase price = X + C =

530 Profit = Tax= A-T Profit

c. You hold the call until expiration, when the index is at 445.

S(t) Profit = Tax = A-T Profit

445

d. How will your answers in A and B be affected if the option positions are not closed out by the end of the year?