Question

I buy three CALL options on AMD with a strike price of $32.50.The option premium is $5.53. Suppose the price of AMD is $36.25 a share and I choose to exercise the option. What are my total gains or losses? Please provide total dollar amount of gains or losses not an amount per share.

Answer #1

Call
option is a type of option contract in which the owner of the
option have **right to buy** the underlying asset at a fixed price from the
writer during the specific period of time. if the buyer of the call
option decides to excise the option on or before the expiration
date the writer has to sell the underlying asset at the fixed price
agreed upon the option. The maximum loss on a call option to the
buyer will be the sum of option premium amount and any other money
used for buying the option and the maximum profit will be infinite
because the price of stock can go upto any rate.

Gain or loss on call option = (market price - strike price - option premium) * number of options

Here,

Option Premium = $5.53

Strike price = $32.5

Market price = $36.25

By substituting the values we get,

= ($36.25 - $32.50 - $5.53) * 3

= -1.78 * 3

= $5.34 LOSS

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