Question

Which of the following is correct about options?

		The buyer of a call option will break even (profit=0) when the price of the stock equals strike price.
		European options can only be exercised on the expiration date but can be sold to another investor on any trading day.
		The time value of a call option can be negative
		The buyer of a call option has the right to any dividends paid after the option was purchased

Answer 1

• The buyer of a call option has to pay a premium to acquire the option, so he will only breakeven when the premium is recovered so the price of the underlying should be equal to strike + premium for the buyer to break even. So this option is incorrect
• European options can only be exercised on the expiration date but can be sold to another investor on any trading day. This option is correct. American options can be exercised any time when it is in the money.
• The time value of a call option is decreasing and can become 0 at the expiry but it cant be negative, so this option is incorrect.
• The buyer of a call option is only getting the right to buy the underlying at the strike price on the expiry date but nothing is said about the dividends. It is not the stock that the investor is buying, it is the option on the stock that the investor is buying. So this option is incorrect.