Question

Suppose a trader buys a call option with a strike price of $30 and a premium of $3.03. When the option was purchased (three months previous), the stock traded for $31/share. At expiration, the stock traded for $38/share. What is the traders net profit or loss, per share? (Type just the number to two decimal places in the response box, without commas, dollar signs or percent signs. Do not enter commas but use negative sign if necessary

Answer 1

Call option is a derivative that gives the option holder/buyer the right to buy asset at a predetermined (strike) price during a specific time period.

This option is valuable or leads to a gain when stock price at option expiration is greater than the strike price.

Call Option payoff = Max (0, S - K),

where S = Spot Price, K = Strike Price

Call Option Profit = Max (0, 38 - 30) = Max(0, 8)

Call Option Profit = $8.However, the trader also paid a premium to buy this option of $3.03.

Hence, net profit = $8 - $3.03 = $4.97