Question

A trader who is short a European call option:

A) Has the same rights as a long European call option holder

B) Profits when the spot price at expiry is greater than the exercise price. There is no limit to potential profit

C) Profits when the spot price at expiry is less than the exercise price. The maximum profit is equal to the option premium

D) At formation of the contract, will have received more for the option than the writer of an equivalent American call option

E) Will be bound to pay out the greater of the difference between the spot price and the exercise price or zero at or any time prior to expiry

Answer 1

Statement A - False - A long European call option holder has a right to buy, whereas, a short European call option writer has an obligation to buy.

Statement B - False - Loss when the spot price at expiry is greater than the exercise price. There is no limit to potential loss. When the spot price at expiry is greater than the exercise price, the buyer of call option will face profit, whereas the short

Statement C - True - As the maximum gain of an option writer is the premium receive.

Statement D - False - The premium of a European option is low and the premium of an American option is high since it allows the liberty to the option holder to exercise the option at any time before the expiration date.

Statement E - False -Will be bound to pay out the greater of the difference between the spot price and the exercise price or zero at expiry (as this is European option). In case of American options, the same is to paid at or any time prior to expiry.