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Suppose stock price today is $40, but you believe the price at exercise will be $130...

Suppose stock price today is $40, but you believe the price at exercise will be $130 .
Given the price today and the price at exercise,what is maximum amount you would  pay to buy a call option on this stock?

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Answer #1

Given only the prices, and ignoring the Time value of money, the maximum price that i would pay to buy a call option will be computed as below-

Call option premium = Current Market price - Exercie price

Call option premium = $40 - $130 = - $90

Since the option premium is negative, we will not pay anything for the call option.

Maximum call option price to be paid = $0

Incase of any doubt, please comment below. I would be happy to help.

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