Question

You bought a call option for $50. The strike price of the option is 200 dollars. If the share price is 250 dollars, how much will you win/loss? explain.

Answer 1

Buyer of the call option has the righ to buy the underlying asset at a predetermined price i.e. Strike Price. At maturity if the Spot Price then, is more than the strike price, then he/she shall exercise the option. This will result in the positive payoff from which the premium will be reduced to arrive at the net profit from the transaction.

We have bought a call and hence will exercise the option if S>X.

Premium = $ 50

S = $ 250

X = $ 200

Payoff = MAX(S-X,0)

= MAX (250-200,0) = $50

Net Profit = Payoff - Premium

= 50 - 50

= $ 0

As there is a break even, we are indifferent to the transaction.