Question

As the writer of a call option with a strike price of $500 and an option...

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

Homework Answers

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).

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