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:
$1 (payoff) and $3 (profit)
$1 (payoff) and $5 (profit)
$1 (payoff) and -$3 (profit)
$0 (payoff) and $4 (profit)
$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
Get Answers For Free
Most questions answered within 1 hours.