Question

(derivatives)

Digital Datawhack stock down by $3, from $50 to $47. "Crunch" Murdoch owns call options on Datawhack, which he bought two months ago for $4 per share. They expire in six months, and have an exercise price of $55. What is the theoretically possible response of the option value (on a per-share basis), to the recent move of the stock?

Answer 1

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Solution

Call option means the buyer has the right to sell and receive payoff if the stock price is above strike price

Here strike price as discussed is $55

Current share price is $47

Hence option value is computed using the formula

=> MAX(Share price - strike price,0)

=> MAX(47-55, 0)

MAX(-8,0)

=> 0

But total payoff is computed by decreasing the call option value at buying price

Hence total response option value

= (0-4)

= -$4