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