Question

# Suppose the current price of a share of ABC stock is \$188. You buy a call...

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)

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.

Feel free to ask in case of any query relating to this question

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