Question

Suppose that March call option in a stock with a strike price of $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the options depends on the stock price at the maturity of the option.

Answer 1

A call option gives the holder or the long part the right but not an obligation to buy the option at the strike price. The long will buy it only when the market price or the spot price at the time of maturity is higher than the strike price because he can buy it at strike price and sell it at the market price and profit from the same. The difference between the spot price and the strike price is the payoff and the profit = payoff -cost of option

If the price at maturity is below the strike price, the long will not exercise the option and his loss will be limited to the cost of purchasing the option.

With this understanding let us now draw the required diagram for the following data set:

Long Call
Spot price	Exercise price	Premium
	50	2.5
	Payoff	Profit
55	5	2.5
54	4	1.5
53	3	0.5
52	2	-0.5
51	1	-1.5
50	0	-2.5
49	0	-2.5
48	0	-2.5
47	0	-2.5
46	0	-2.5
45	0	-2.5

Long Call con una 47 49 51 53 55 57 Payoff Profit