Question

If I buy a call option with a price of $1, with a strike price of $110, and the stock price ends up being $90, what is my holding period return?

How would this return be different if a dividend of 2.5% was received?

Subject: Portfolio management

Answer 1

Since the stock price is less than the strike price, the call option will become worthless. In other words, the premium is lost completely i.e - 100% return.

If dividend of 2.5% was received, the dividend accrues to the call option buyer only if he exercises the option on or before the record date. Here, since the stock price is way below the strike price, it doesn't make sense to exercise the option. Hence the dividend won't be received and the return remains the same at -100%