Question

An oil producer is interested in a European call option to buy a share for $135.00 costs $9.00. The stock currently trades for $123.00. If the option is held to maturity under what conditions does the holder of the option make a profit? Explain why.

Note: ignore the time value of money.

Answer 1

Solution

Here if the spot price of the share is more than the strike price ,the holder of the call option can make a profit but it also depends on the amount by which the spot price exceeds the strike price as the investor will also have to couver the cost of buying the call option

Profit=Spot price-Strike price-Call option cost

Putting values

Profit=Spot price-135-9

Profit=Spot price-144

Thus from above equation we can see that ,in order to have a profit, the spot price of the share at the time of maturity must be greater than 144