Question

Lindsey bought an option that gives her the right but not obligation to buy a share of Nike. At the time of purchase, the option had a strike price of $200, a bid price of $70.75, an ask price of $72.89, with a 1/20/2021 expiration date. On the expiration date, the stock is trading at $346.50. What is the profit on this option at the expiration date?

Answer 1

Call Option:
Holder of call option will have right to buy underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of call option.
He will exercise the right, when expected spot price > Strike Price. Then writer of option has to sell at the strike Price.

If we wish to buy call option, we need to consider Ask rate. Thus $ 72.89 is relevant and we need to pay $ 72.89 as premium for having that right.

Value of call = Future spot Price - Strike Price

= $ 346.50 - $ 200

= $ 146.50

Profit = Value of call - Premium paid

= $ 146.50 - $ 72.89

= $ 73.61

Profit on expiration date is $ 73.61