Question

As the writer of a call option with a strike price of $500 and an option premium of $50, how much will you gain/lose if at the maturity of the contract the value of the underlying asset is $450?

Group of answer choices

50

500

-450

0

Answer 1

Writer of call option will gain the premium amount when if the market closes below the strike price.

• When the market moves up, the premium of the call option will increase.
• When the market moves down, the premium of the call option will decrease.
• When the market expires below the strike price of the call option, the premium expired worth-less (zero)

While writing:

• Strike Price = $500
• Premium received = $50

During Expiry

• Strike Price = $500
• Market price of the underlying asset = $450
• Premium to be paid = $0 {the option will become worth-less}
• Gain = Selling price - buying price = $50 - $0 = $50

Hence, there will be a gain of $50 (Correct answer is Option A).