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Let's assume a company's shares have a current market price of $100
Let's assume a company's shares have a current market price of $100. An investor wants to purchase a call option with a strike price of $110 and an option price of $6 (since call option contracts include 100 shares, the total cost of the call option would be $600). 1. What would happen in the price at expiration is $105. 2. What would happen in the price at expiration is $113. 3. What would happen in the price at expiration is $116. 4. What would happen in the price at expiration is $125
Expert Solution
1. The price at expiration is $105; it is less than strike price of $110, therefore expire unexercised
And investor will bear a loss of $600 (call price)
And investor will bear a loss of $600 (call price)
2. The price at expiration is $113; it is more than strike price of $110, therefore option will get exercised
Profit/Loss = 100 * ($113 -$110) - $600 = -$300
And investor will bear a loss of $300
3. The price at expiration is $116; it is more than strike price of $110, therefore option will get exercised
Profit/Loss = 100 * ($116 -$110) - $600 = 0
And investor will be at no profit, no loss situation
4. The price at expiration is $125; it is more than strike price of $110, therefore option will get exercised
Profit/Loss = 100 * ($125 -$110) - $600 = $900
And investor will be at profit of $900
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