A call option on MSFT (Microsoft) stock has the following terms: exercise/ strike price is $305; expiration date is December 30, 2022; the option premium is $20. The investor holds this option until the expiration date. On the expiration date, MSFT share price is $355. What is the profit the investor has on the expiration date? Assume each option contract is for 1 Microsoft share. $0 $50 $20 $30
A call option on MSFT (Microsoft) stock has the following terms: exercise/ strike price is $305; expiration date is December 30, 2022; the option premium is $20. The investor holds this option until the expiration date. On the expiration date, MSFT share price is $355. What is the profit the investor has on the expiration date? Assume each option contract is for 1 Microsoft share. $0 $50 $20 $30
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A call option on MSFT (Microsoft) stock has the following terms: exercise/ strike price is $305;
expiration date is December 30, 2022; the option premium is $20. The investor holds this option
until the expiration date. On the expiration date, MSFT share price is $355. What is the profit the
investor has on the expiration date? Assume each option contract is for 1 Microsoft share.
$0
$50
$20
$30
19
Ma
Expert Solution
Step 1
A call option gives the holder the right but not the obligation to buy at the strike price. A call option only makes money if at expiry the spot price is greater than the strike price.
The payoff of a call option can be determined as follows:
Payoff = Maximum value between (Spot Price at expiry - Strike Price,0)
Profit = Payoff - premium paid
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