Question

Assume you are looking at a call option on Bristol Cities Inc. with an exercise price of $104. Current stock price today is $102 and the option has a premium of $3. What will be the profit or loss earned by the speculator at prices of $101, $104 and $112 just before time of expiry? Assume the option will not be exercised until maturity.

Answer 1

Exercise price of call option (X) = $104

Premium paid = $3

Price at maturity (S) = $ 101

Value of call option = max (0, S-X) = max (0,101-104) = 0

Profit / (loss) of option = value of option at maturity - premium paid = 0 - 3 = (-$3)

Exercise price of call option (X) = $104

Premium paid = $3

Price at maturity (S) = $ 104

Value of call option = max (0, S-X) = max (0,104-104) = 0

Profit / (loss) of option = value of option at maturity - premium paid = 0 - 3 = (-$3)

Exercise price of call option (X) = $104

Premium paid = $3

Price at maturity (S) = $ 112

Value of call option = max (0, S-X) = max (0,112-104) = $8

Profit / (loss) of option = value of option at maturity - premium paid = 8 - 3 = $ 5

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