Question

Suppose the current price of a share of ABC stock is $188. You buy a call option (June 2020 expiration date and $190 strike price) on ABC stock at a call premium of $4. If the price of ABC stock on the expiration day is $189, the payoff and profit of your investment on the call option will be:

	A.	$1 (payoff) and $3 (profit)
	B.	$1 (payoff) and $5 (profit)
	C.	$1 (payoff) and -$3 (profit)
	D.	$0 (payoff) and $4 (profit)
	E.	$0 (payoff) and -$4 (profit)

Answer 1

The payoff is computed as shown below:

= Price at expiration - Strike price

= $ 189 - $ 190

= - $ 1

In case of buying a call option, the payoff cant be negative. Hence it will be $ 0

Profit is computed as shown below:

= Price at expiration - strike price - premium paid

= $ 189 - $ 190 - $ 4

= - $ 5

In case of buying a call option, the maximum loss is restricted to the amount of premium paid which in this case is $ 4.

So, the correct answer is option E.

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