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

The profit or loss is computed as shown below:

= Price just before time of expiry - exercise price - premium

a. The profit or loss is computed as shown below:

= $ 101 - $ 104 - $ 3

= - $ 6

However, in case of buying a call option, the maximum loss is restricted to the amount of premium paid. Hence the loss is $ 3.

b. The profit or loss is computed as shown below:

= $ 104 - $ 104 - $ 3

= - $ 3

c. The profit or loss is computed as shown below:

= $ 112 - $ 104 - $ 3

= $ 5

Feel free to ask in case of any query relating to this question