Question

Please explain work

Suppose you bought a CALL option on a share of Tesla stock (Strike Price $200, Expiration Date 11/1/2020) today for a price of $4.99. On the expiration date, the price of a share of Tesla is $300. Answer the following questions using the information above.

Is it in your best interest to exercise the CALL option? Why?

What is your Payoff?

Your profit is (nearest dollar)?

Answer 1

A call option is the right to purchase a share on expiry date at strick price i.e. $200 irrespective of the market price on the expiry date.

Now on the expiry date, the market price is $300, and the strike price of call option is $200 which means that strike price < market price so I will excise the option and buy the share at $200 which is in the best interest.

Reason for above decision is same that Strike price < Market price.

Pay off is Maximum {(Stock price - Strike price),0} = Max( $300 - $200,0) = $100 = $100

Pay off = $100

Profit = Pay off - premium of call option = $100 - $4.99 = $95.01 or $95